StarHub - DBS Research 2020-11-06: 5%+ Dividend Yield Amid Declining Earnings


StarHub - 5%+ Dividend Yield Amid Declining Earnings

  • StarHub's 3Q20 net profit of S$44.5m (+20% q-o-q, -23% y-o-y) was 10% above our expectations.
  • FY20F/21F earnings raised by ~2%/3% due to pick-up in equipment sales and contribution from enterprise business, despite weak mobile services revenue.

StarHub's 3Q20 net profit 10% above our expectations

  • StarHub (SGX:CC3)'s 3Q20 net profit of S$44.5m (+20% q-o-q, -23% y-o-y) was 10% above our expectations. The quarterly increase in revenue by S$36.3m to S$489.7m in 3Q20 more than offsets the S$14.5m increase in operating expenses.
  • Taken on an y-o-y basis, StarHub's 3Q20 operating expenses declined by 13% to reach S$355.9m, with cost items across the board declining in line with StarHub’s three-year cost savings plan.
  • As at 3Q20, StarHub had executed over 75% of the ~S$210m cost-savings programme. 3Q20 earnings before interest and tax (EBIT) of S$64.4m includes S$3.0m of operating profits contributed by cybersecurity & regional ICT services. Taken as a whole, the telco reported net profits of S$44.5m in 3Q20 surpassing street’s expectations.
  • StarHub's 3Q20 revenues of S$489.7m (+8.0% q-o-q, -14% y-o-y) improved q-o-q by S$36.3m due to Strateq and rebound in equipment revenues. Enterprise business revenue increased 14% q-o-q in 3Q20, mainly due to higher revenues from regional ICT services as a result of the consolidation of Strateq following the completion of the acquisition on 30 July 2020.
  • StarHub acquired Malaysia-based IT solutions provider Strateq for ~S$82m at an estimated 20x price-to-earnings ratio (PE) multiple. Over the last two months of 3Q20, Strateq reported revenues of S$17.6m.

Revenue from sales of equipment improved by S$23.7m to S$100.9 m (+31% q-o-q, -27% y-o-y) in 3Q20.

  • The handset market is recovering from the revenue plunge in the previous quarter where a lower volume of handsets was sold during the Circuit Breaker period implemented from 7 April to 1 June 2020.

Mobile services revenue plunged S$9.3m to S$134.1m (-6.5% q-o-q, -29% y-o-y) in 3Q20.

  • StarHub's Postpaid ARPU declined by S$1 during the quarter to S$29 mainly due to lower IDD and roaming charges incurred with the significant drop in global travel caused by the COVID-19 pandemic. While pre-paid ARPU improved by S$2 q-o-q to S$12, the number of pre-paid subscribers plummeted by 17% during the quarter to 526,000 (-33% y-o-y) on absence of tourist arrivals as a result of border control measures and migrant worker income was heavily affected. Overall average, data usage continued to grow to reach 11.4Gb in 3Q2020 (2Q2020: 10.0Gb; 3Q2019: 8.8Gb)
  • In 3Q20, other income of S$9.2m included S$7.0m of Jobs Support Scheme (JSS) payouts being recognised (9M20 JSS payout of S$22.7m).

Update on 5G deployment

  • 70% non-stand-alone (NSA) network coverage as at 3Q20. StarHub and M1 JV have commenced working on the 3.5GHz 5G stand-alone (SA) rollout planned for 4Q20. Vendors have been appointed and the JV has completed the identification of its 5G base station sites. Currently site preparation and installation are underway. In addition, the JV has currently achieved 70% NSA national coverage.

StarHub's FY20F/21F earnings forecasts raised by ~2%/3%.

  • Upward revision of StarHub's earnings primarily due to pick up in equipment sales and contribution from enterprise business segment, despite weak mobile services revenue. Mobile services revenue continues to be heavily impacted due to SIM-only plans and heightened competition. Taking the overall impact into consideration, we have revised our StarHub's FY20/21F earnings forecast up by ~2%/3% to S$150.7m and S$131.3m respectively.
  • Maintain HOLD. Our DCF valuation is based on a WACC of 7.9% (terminal growth 0%). Our terminal growth rate is zero to reflect heightened competition in the market, especially for the mobile services segment.
  • See StarHub Share Price; StarHub Target Price; StarHub Analyst Reports; StarHub Dividend History; StarHub Announcements; StarHub Latest News.
  • StarHub's share srice is currently trading at a FY21F dividend yield spread of 4.3% above its average spread of 3.9%.
  • StarHub is cutting its dividend payout to 80% from FY20F onwards to ride out the strain on its cashflows.

5%+ dividend yield attractive but earnings need to stabilize first.

  • StarHub's mobile services revenue continues to be decline due to SIM-only plans and heightened competition. While we believe that TPG does not have a business case in Singapore, the capital injection of ~S$170m into TPG might help it to sustain for another two years and industry consolidation could be delayed to FY22.
  • While 5G-related capex is relatively low due to JV with M1, these savings might not translate into dividends if StarHub chooses to go for acquisitions.

Sachin MITTAL DBS Group Research | https://www.dbsvickers.com/ 2020-11-06
SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.21 UP 1.160