StarHub - UOB Kay Hian 2021-05-06: 1Q21 Below Expectations; Benefits From Reopening Of Economic Activities

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STARHUB LTD (SGX:CC3)

StarHub - 1Q21 Below Expectations; Benefits From Reopening Of Economic Activities

• StarHub reported a 24% y-o-y and 15% q-o-q decline in 1Q21 net profit of S$30.5m. Stripping out JSS, earnings grew by 17% q-o-q on the back of stable blended ARPUs and better margins in Pay TV and broadband (as a result of cost optimisation). The earnings were below expectation and we cut our 2021 net profit forecast by 7%.
• Maintain HOLD on StarHub with a marginally lower DCF-based target price of S$1.30.
• Entry price: S$1.15.

STARHUB'S 1Q21 RESULTS

Weak top-line partly mitigated by good cost control.

• StarHub (SGX:CC3) reported 1Q21 net profit of S$30.5m (-24% y-o-y, -15% q-o-q). Stripping out the lumpy one-off JSS scheme, earnings would have risen 17% q-o-q on the back of stable blended ARPUs and improved margin from the pay TV and broadband segment.

Earnings below expectation

• Earnings accounts for only 20% of our full-year 2021 forecast and we deem the 1Q21 results to be below expectations. The deviation on our end stemmed from lower-than-expected service and enterprise revenue. We understand that there was an unusually high cyber securities contract booked in 1Q20 versus a more normalised leve in 1Q21.

STOCK IMPACT

Mobile: Revenue fell 21% y-o-y and 7% q-o-q to S$130m.

• StarHub's postpaid ARPU fell 18% y-o-y and 7% q-o-q to S$28/month due to lower roaming, VAS and excess data usage.
• StarHub's prepaid ARPU fell 9% y-o-y and q-o-q to S$10/month. Prepaid subscribers fell by 30,000. The prepaid segment was adversely affected by the decrease in tourist numbers and foreigners on work passes resulting from COVID-19 travel restrictions that started in late-Mar 20.
• Stripping out the IFRS accounting impact, blended ARPUs were stable q-o-q – reflected in the benign competitive landscape in Singapore.

Enterprise: Revenue fell 18% q-o-q but was flat y-o-y.

• The drop in revenue was led by a 32% y-o-y and 42% q-o-q drop in cyber security revenue in 1Q21, due to project delays. This was partly offset by higher regional ICT services with the incorporation of Strateq (recorded operating loss of S$0.5m in 1Q21).

Pay-TV: ARPU stabilising.

• StarHub's pay-TV revenue fell 4% y-o-y amid the lower subscriber base and lower commercial and advertising contribution. Positively, ARPU was stable q-o-q at S$40/month with the completion of cable-fibre migration and less aggressive promotional activities.

Broadband: Resilient underlying demand.

• StarHub's broadband revenue continued to rise 13% y-o-y and 3% q-o-q thanks to robust demand of high-quality broadband amid the stay-home norm, as well as reduced discounts extended to customers. ARPU inched up to S$31/month.

1Q21 service-to-EBITDA margin improved 2ppt q-o-q

• StarHub's 1Q21 service-to-EBITDA margin improved 2ppt q-o-q reflecting:
  1. ongoing cost optimisation initiatives – leading to better business margin for Pay TV and broadband;
  2. lower staff cost;, and
  3. lower marketing and promotion expenses.

StarHub's key priorities for 2021

• Key priorities for StarHub in 2021 include:
  1. enriching customer experience;
  2. empowering enterprises – converged connectivity & ICT;
  3. effective 5G rollout;
  4. evolving operating model; and
  5. pursuing synergetic M&As.

EARNINGS REVISION/ RISK

• We cut our StarHub's 2021-22 earnings forecast by 7% and 5% to account for weaker-than-expected service revenue and enterprise income.

VALUATION/ RECOMMENDATION

• Maintain HOLD on StarHub with a marginally lowered DCF-based target price of S$1.30 (COE: 8.6%; terminal growth: 0%) in tandem with the earnings cut.
• At our fair value, StarHub will trade at 6x 2021F EV/EBITDA, 1 standard deviation below its 5-year mean EV/EBITDA of 8.5x.
• StarHub offers a sustainable dividend yield of 4.8% for 2021. Suggest entry price is S$1.15.
• See
  • StarHub's Share Price,
  • StarHub's Target Price,
  • StarHub's Analyst Reports,
  • StarHub's Dividend History,
  • StarHub's Announcements,
  • StarHub's Latest News.

SHARE PRICE CATALYST

• A key re-rating for StarHub includes the return of tourists to Singapore.
• Market consolidation – exit of MNVOs.
• Potential network carved out/shift to an asset light business model (sale and leaseback of network). Management is of the opinion that the cost of capital from the capital market is much more attractive vs the leasing model at this juncture.
• Faster-than-expected 5G adoption and new business cases in Singapore.

Chong Lee Len UOB Kay Hian Research | Chloe Tan Jie Ying UOB Kay Hian | https://research.uobkayhian.com/ 2021-05-06

SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.30 DOWN 1.400