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Author: kimeng   |   Latest post: Thu, 7 Nov 2019, 5:40 PM

 

StarHub Ltd: More Post-paid ARPU Erosion Awaits

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  • Well-expected dividend cut
  • Putting plans into motion
  • Maintain FV of S$1.64

In-line Results

Starhub’s 1Q19 results were within our expectations. Revenue rose 6.0% YoY to S$596.8m, boosted by higher contribution from the Enterprise Business and Sales of equipment, but partially offset by lower revenue from Mobile, Pay TV and Broadband. The group’s Mobile segment registered a 5.3% YoY decline in revenue, due to lower IDD, voice and excess data usage revenue and lower data subscription and value-added services revenue.

Pay TV continued to show weakness, dropping 12.4% YoY to S$70.7m. As we understand from management, the group’s Cyber security division saw an EBITDA loss of ~S$5m.

Service EBITDA margin was 2.0 ppts higher YoY at 33.7%; excluding the SFRS (I) 16 accounting change on operating leases, the margin would have been lower by 1.7 ppts YoY at 30.0% instead. Profit from operations fell 13.9% YoY to S$72.1m, though if we were to strip out the Cyber security services, there would have been a gain of S$4.9m instead. The group’s PATMI fell 14.2% YoY to S$54.0m, which constitutes 27.7% of our full-year forecast. The group has declared a DPS of 2.25 S-cents, which is a steep but wellexpected cut from 4 S-cents in 1Q18.

Rolling Out Its Plans

In the mobile space, we note that the group has added 74k post-paid subscribers to its customer base, which we believe stems from greater SIMonly take up. Unsurprisingly, this has continued to weigh on ARPU, which has dropped by S$4 YoY to S$39. Management believes this trend would likely continue until the end of 2019.

Management is currently still in the process of negotiating with content providers (as contracts come up for expiry) to operate on a variable Pay TV cost model, rather than a fixed cost one. As we understand, there is one more major contract left to renegotiate.

The group continues to articulate its intention to capture opportunities in the Cyber security business, but the timeline as to when it turns EBITDA positive remains unclear. Since our downgrade in mid-Feb, the stock has declined by 16.8%.

Starhub is now trading at an EV/EBITDA multiple of 6.3x, which is 2.3 S.D. below its 5 –year mean. We maintain our FV of S$1.64 for now but upgrade our rating from Sell to HOLD.

Source: OCBC Research - 6 May 2019

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