StarHub - RHB Invest 2020-08-10: 2Q20 Weak As Expected; 5G Capex Surprise

STARHUB LTD (SGX:CC3)

StarHub - 2Q20 Weak As Expected; 5G Capex Surprise

StarHub (SGX:CC3)’s results were a slight miss, supported by job support scheme (JSS) payouts. While revenue pressure should ease in 2H20, EBITDA margin may stay pressured from competition and project delays.
We lower FY20-22F core earnings by 7-14%, and roll forward our base year to FY21. At -2SD from the historical EV/EBITDA mean, downside risks are priced in.
Competition and execution are key risks.

StarHub's 2Q20 NPAT fell 8% q-o-q (-6% y-o-y), reflecting the full-quarter impact of the COVID-19 pandemic on revenue and EBITDA, partially mitigated by the SGD15.7m in 2Q20 JSS payouts. Stripping this out, core earnings slumped 34% q-o-q (-33% y-o-y), a slight miss/within our (46%)/consensus estimates (50%).
A 2.5-SG cent DPS was declared, reflecting the 80% minimum payout guidance (core earnings).

Service revenue fell by 15% y-o-y and 7.1% q-o-q (1H20: -12% y-o-y) with broad weakness across all segments, save for enterprise (1H20: +8% y-o-y). The contraction in mobile revenue accelerated to 12.3% q-o-q (-25.4% y-o-y) as COVID-19-led travel restrictions pounded roaming and IDD revenues, alongside lower excess data usage.
Prepaid and postpaid revenues fell 9-12% q-o-q to quarterly lows, due to the lower subscriber (subs) base (-4% q-o-q). Enterprise business revenue declined by 7% q-o-q, due to the higher base of 1Q20 project completions and delays in the execution of new projects due to the circuit breaker.
Positively, pay-TV and broadband segments stabilised further, with q-o-q revenue expansion and ARPU uplift.

The 50:50 equity share in the special purpose vehicle (JVCo) set-up with M1 will see StarHub committing SGD200m in 5G capex over five years (including core network investments), with > 50% to be front-loaded in the next 12 months. The amount is much lower than market expectations, but StarHub noted additional investments are contingent upon business demands.
The JVCo will share the radio access network (RAN), and maintain independent core networks for service differentiation and innovation (multi-operator core network configuration). 5G deployment will start by end-2020F, with commercial service in 2021F.

StarHub's management now guides for FY20 service revenue to decline by 10- 12% with service EBITDA margin at 26-29% (unchanged pre-withdrawal), which implies weaker 2H20 EBITDA. Capex/sales is tweaked slightly to 6- 8% (from 6-7%), excluding 5G and spectrum payments, while DPS guidance is lowered to 5 cents (including the 2.5 cents in 1H20 vs 9 cents), reflecting the challenging macro-economic environment and to maintain sufficient buffer for investments (80% of recurring earnings).
We cut StarHub's FY20-22F core earnings by 7-14%, mainly to factor in 5G capex and spectrum payouts, and weaker revenue/EBITDA margin run rates, partially offset by opex savings.
NEUTRAL, new DCF-based Target Price of SGD1.30 from SGD1.44, 7% upside with c.4% FY20 yield.
See StarHub Share Price; StarHub Target Price; StarHub Analyst Reports; StarHub Dividend History; StarHub Announcements; StarHub Latest News.

Singapore Research RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-08-10

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