StarHub - CGS-CIMB Research 2020-11-09: Cost Savings Key To 3Q20 Earnings Beat


StarHub - Cost Savings Key To 3Q20 Earnings Beat

  • StarHub's 3Q20 core EPS beat our expectations on lower-than-expected opex.
  • Enterprise sales rose further despite COVID-19 but mobile revenue was weak.
  • Reiterate ADD on StarHub with an unchanged DCF-based target price of S$1.60.

StarHub's 3Q20 earnings outperformed due to solid cost containment

  • StarHub (SGX:CC3)'s 3Q20 EBITDA (ex-Job Support Scheme payout (JSS)) fell 19.6% y-o-y (+19.8% q-o-q) on lower revenue and margins and recovery of tunnel fees from TPG. Hence, core EPS tumbled 31.7% y-o-y (+59.9% q-o-q), partly helped by lower depreciation and effective tax rate.
  • 9M20 EBITDA/core EPS beat our expectations at 81%/93% of our FY20F forecasts on lower-than-projected opex but slightly missed Bloomberg consensus (73%/71%).

Enterprise does well despite COVID-19 but mobile stays weak

  • StarHub's 3Q20 mobile service revenue was softer than expected, down a steep 29.4% y-o-y (-6.5% q-o-q) owing to lower roaming/IDD, excess data usage and prepaid SIM sales (COVID-19 travel restrictions) and keen competition.
  • Pay TV/broadband revenues were in line, further rising 0.4%/5.3% q-o-q (-16.0%/+5.3% y-o-y) as cable-to-fibre migration subscription discounts expired.
  • For fixed enterprise, revenue climbed a robust 11.3% y-o-y (+13.5% q-o-q) as cybersecurity’s 18.0% y-o-y growth and Strateq’s maiden contribution (from Aug) outpaced weaker data/Internet (-4.6%) and managed services (-7.9%). Nevertheless, StarHub expects there will be continued deferment of new investments that will result in projects being delivered next year.

Service revenue decline led to service EBITDA margin dilution y-o-y

  • StarHub's 3Q20 service EBITDA margin (ex-JSS) fell 2.9% pts y-o-y (+4.6% pts q-o-q) to 32.1% due to lower service revenue and other income. This was buffered by better-than-expected turnaround in cybersecurity’s EBIT (from -S$3.6m in 3Q19 to S$2.8m in 3Q20) and cost savings (-13.7% y-o-y; including content and other discretionary opex).
  • Due to seasonally higher opex, StarHub expects its 4Q20 service EBITDA margin to be lower q-o-q. Hence, it kept its FY20 guidance of 27-29% margin (9M20: 32.1%).

StarHub's FY20/21F core EPS to fall 40%/31% before recovering in FY22F

  • We
    1. raise StarHub's FY20F core EPS by 12.0% to factor in lower cybersecurity/content costs, higher device margin and Strateq’s consolidation,
    2. cut StarHub's FY21F’s by 8.4% to bake in a more gradual recovery in roaming revenue (with international travel affected for much of FY21 (previously projected till mid-FY21)), and
    3. raise StarHub's FY22F’s by 6.6% for higher enterprise profitability.
  • We now see core EPS tanking 40.2%/30.8% y-o-y in FY20/21F due to COVID-19 and mobile competition, then rebounding 53.6% y-o-y in FY22F.

Reiterate ADD on StarHub; DCF-based target price kept at S$1.60 (WACC: 6.7%)

FOONG Choong Chen CGS-CIMB Research | Sherman LAM Hsien Jin CGS-CIMB Research | 2020-11-09
SGX Stock Analyst Report ADD MAINTAIN ADD 1.600 SAME 1.600