StarHub - UOB Kay Hian 2020-11-09: 3Q20 Above Expectations, Stable Operating Landscape Heading Into 1H21


StarHub - 3Q20 Above Expectations, Stable Operating Landscape Heading Into 1H21

  • StarHub's 3Q20 net profit rose 20% q-o-q to S$44.5m on the back of positive customer acquisition activities. This brings 9M20 net profit to S$121.8m (-20% y-o-y). Accounting for 80% of our full-year forecast, the results are ahead of expectations.
  • Consequently, we raise our StarHub's 2020 earnings forecast by 5% to factor in full-year Jobs Support Scheme payouts of S$30m.
  • Positively, the uptake of 5G handsets and plants have been encouraging, but will take a longer time to generate net profit for StarHub.
  • Maintain BUY with DCF-based target price of S$1.40.

StarHub's 3Q20 results ahead of expectations.

  • StarHub (SGX:CC3) delivered 3Q20 net profit of S$44.5m (-23% y-o-y, +20% q-o-q). The sequential improvement came as the reopening of the economy allowed the company to resume customer acquisition activities. y-o-y decline reflected:
    1. the absence of travel-related revenue;
    2. a 27% y-o-y drop in equipment sales; and
    3. 16% y-o-y decline in pay-TV revenue.
  • This brings StarHub's 9M20 net profit to S$121.8m (-20% y-o-y). Accounting for 80% of our full-year forecast, we deem the results above expectations. The results are also ahead of street estimates.

Key takeaways from StarHub's post-3Q20 conference call

5G: Progressing well...

  • As of end-Sep 20, StarHub’s 5G Non-Standalone (NSA) network has reached 70% of population coverage - the widest in Singapore at this juncture. Thus far, the group has completed 5G base station site identification with site preparation and installation currently underway.
  • To achieve the national aspiration of deploying 5G Standalone (SA) network, StarHub has appointed vendors, but mobile plans based on 5G SA network will only be launched towards 2Q/3Q21.

…with good traction seen in mobile and business.

  • Management sees encouraging early indications of the market’s appetite for 5G services. Take-up of 5G mobile plans and handsets have been encouraging and management appears optimistically cautious on the industry’s ability to lift average revenue per user (ARPU) with better speed and quality of service with SA 5G services.

Next phase of IT transformation.

  • StarHub commenced IT transformation initiatives in 3Q20, which will focus on technology and business process transformation. Savings will only materialise from 2023 onwards, if there are any, since StarHub will look to reinvest those savings. This will be the next phase of transformation for the next 3-4 years following the 3-year S$210m cost transformation programme that will end in Oct 21.


Mobile: Revenue fell 29% y-o-y and 7% q-o-q to S$134.1m

  • StarHub's Mobile revenue fell 29% y-o-y and 7% q-o-q to S$134.1m amid:
    1. absence of tourism-related revenue; and
    2. lower plan subscriptions.
  • StarHub’s market share slipped to 22.6% in 3Q20 (2Q20: 23.6%, 3Q19: 25%). Postpaid revenue fell 29% y-o-y and 7% q-o-q. Postpaid saw 1,000 net add thanks to higher Giga! Subscribers, but ARPU fell 26% y-o-y and 2% q-o-q amid lower roaming and value-added services (VAS) revenue.
  • Prepaid revenue fell 34% y-o-y (flat q-o-q). Prepaid subscribers fell 108,000 in the absence of tourist arrivals and ARPU fell 11% y-o-y and 5% q-o-q.

Enterprise: Consolidation of Strateq.

  • StarHub's enterprise revenue grew 11% y-o-y and 14% q-o-q to S$162m thanks to:
    1. the consolidation of Strateq (accounts 11% of enterprise revenue) following the completion of acquisition in end-July; and
    2. higher cyber security revenue (+18% y-o-y, +15% q-o-q).
  • This was partly offset by lower contribution from managed service solutions (-8% y-o-y) due to fewer project completions amid the COVID-19 outbreak.

Pay-TV revenue: ARPU stabilising.

  • StarHub's Pay-TV revenue fell 16% y-o-y (flat q-o-q) amid lower commercial and advertising contribution. Positively, ARPU was stable at S$40 with the completion of cable-fibre migration and less aggressive promotional activities.

Broadband revenue: Resilient underlying demand.

  • StarHub's Broadband revenue grew 6% y-o-y and 5% q-o-q thanks to robust demand of high-quality broadband amid the stay-home norm, as well as reduced discounts extended to customers. As a result, ARPU grew 11% y-o-y and 7% q-o-q.

3Q20 service EBITDA margin improved 2ppt q-o-q with good cost discipline.

  • This was also underpinned by:
    1. ongoing operational efficiency;
    2. lower device cost amid a delay in the iPhone 12 launch; and
    3. lower content cost.

Maintain BUY on StarHub

  • Maintain BUY on StarHub with unchanged DCF-based target price of S$1.40 (COE: 8.7%; terminal growth: 0%).
  • We have raised our StarHub's 2020 net profit forecast by 5% to factor in full-year Jobs Support Scheme payouts amounting to S$30m. This will be partly offset by higher device cost in 4Q20, we opine.
  • At our fair value, StarHub will trade at 6.7x 2021F EV/EBITDA, 1SD below 5- year mean EV/EBITDA of 8.6x. The stock appears to be well-positioned to defend market share by activating customer acquisition and rolling out new products towards end-20.
  • See StarHub Share PriceStarHub Target PriceStarHub Analyst ReportsStarHub Dividend HistoryStarHub AnnouncementsStarHub Latest News
  • Attractive dividend yield of 5%. Based on the current business recovery, StarHub has guided that 2H20 dividend could exceed the 2.5 cents declared for 1H20.

Chong Lee Len UOB Kay Hian Research | Chloe Tan Jie Ying UOB Kay Hian | https://research.uobkayhian.com/ 2020-11-09
SGX Stock Analyst Report BUY MAINTAIN BUY 1.400 SAME 1.400