StarHub - UOB Kay Hian 2020-09-14: A Recovery Plan, Telco Deemed Essential Spending; Upgrade To BUY

STARHUB LTD (SGX:CC3)

StarHub - A Recovery Plan, Telco Deemed Essential Spending; Upgrade To BUY

StarHub sees recovery trends in 2H20 and appears well positioned to defend market share by activating customer acquisition activities and new products. Its recently launched 5G product have been encouraging and the proliferation of handsets will yield higher 5G adoption.
The 18% StarHub's share price retracement has largely priced in weak 2020 earnings.
Upgrade StarHub to BUY with an unchanged DCF-based target price of S$1.40. The stock offers 5% dividend yield.

StarHub (SGX:CC3) re-instated its earnings guidance, projecting a 10-12% y-o-y decline in service revenue for 2020 (2019: -4% y-o-y). 1H20 saw a -15% y-o-y service revenue contraction in the absence of tourist prepaid revenue, roaming revenue and lower handset revenue due to logistics disruption.
Together with good cost discipline, deferment of customer acquisition cost and lower marketing cost, StarHub expects 2020 EBITDA margin to remain stable at 27-29% (2019: 26.5%).

Positively, management alluded to recovery trends for 2H20. As such, it guides StarHub's 2H20 dividends potentially exceeding the 2.5 S cents paid in 1H20. This is the result of capex and cost deferment to-date with capex intensity (capex-to-revenue) of 6-8% for 2020 (2019: 10%).
We project 2020 and 2021 net DPS of 5.5 and 6 S cents respectively, based on a 60% dividend payout (2019: 87%). These translate into net dividend yields of 4.7% and 5.2% respectively. See StarHub Dividend History.

As the economy reopens, StarHub is expected to resume customer acquisition activities, reactivate marketing plans and launch new products. This will help it defend market share going into next year. Recently, StarHub launched Singapore’s maiden 5G pricing package and we gathered the take-up has been encouraging.

At this juncture, we believe the ARPU uplift from the 5G roll-out will be limited as consumers are unlikely to migrate to a premium 5G-pricing services when the existing 4G/LTE networks provide adequate speed for daily usage.
Nevertheless, StarHub believes the opportunities for 5G would come from bundling mobile plans with services beyond connectivity, such as gaming and VR/augmented reality services. The proliferation of affordable 5G handsets will pave the way for a successful 5G adoption.

We believe the incremental opportunities of 5G investment will rely heavily on enterprise business solutions. Some of the business cases may include artificial intelligence (AI)-driven industrial devices, network slicing monetisation and IoT services for smart buildings/smart cities.
That said, earnings accretion will remain elusive in the medium term, given heavier system integration process.

The 5G collaboration between StarHub and M1 encompasses the sharing of active radio network, including the 3.5GHz spectrum, antennas, radio base stations and transmission backhaul (see chart in PDF report attached below).
In addition, the JV would be jointly wholesaling the nationwide 5G access to other mobile network operators (MNO) or mobile virtual network operators (MVNOs).
Having said that, the core network for 5G and existing 3G/4G would still be run independently and services to consumers and enterprises would remain fully differentiated.

While the nationwide 5G network is slated to commercially roll out by Jan 21, we gather that the 5G capex for StarHub alone is estimated at S$200m over five years starting 2H20. The estimated S$200m capex will include StarHub’s own budget for optimising its 5G core network as well as its 50% capex proportion to StarHub-M1 JV.
We estimate the capex intensity for StarHub at 11-13% for 2020-21 even as capex is guided to be frontloaded for the first two years. This is lower vs the 14-15% during the transition of 4G investment.

Broadly, management remains committed to pursuing cost optimisation efforts of S$210m over three years (2019-21). To date, StarHub has achieved more than 75% of the total cost savings from:
1. renegotiation of expiring contracts;
2. lower pay-TV content costs; and
3. workforce optimisation.

Upgrade StarHub to BUY with an unchanged DCF-based target price of S$1.40 (COE: 8.7%; terminal growth: 0%) as StarHub's share price has retraced 18% ytd.
See StarHub Share Price; StarHub Target Price; StarHub Analyst Reports; StarHub Dividend History; StarHub Announcements; StarHub Latest News.
We believe 2020 weak earnings have been largely factored in as StarHub is currently trading close to -2SD below its mean EV/EBITDA of 8.6x. At our target price, the stock trades at 6.7x 2021F EV/EBITDA, or -1SD below mean valuation.

Chong Lee Len UOB Kay Hian Research | Chloe Tan Jie Ying UOB Kay Hian | https://research.uobkayhian.com/ 2020-09-14

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