• NPAT met 25% of FY16 estimate
• Maintains FY16 guidance
• Expected 18% total return from here

1Q16 earnings better than expected

StarHub Ltd reported a better-than-expected set of 4Q15 results. Revenue slipped 4.4% YoY to S$590.4m, meeting about 24% of our full-year forecast; this mainly due to lower revenue from the sale of equipment. And because StarHub also sold more low- to mid-end models, this led to a 19.7% slide in cost of sales as well as a 9.1% fall in operating expenses; as a result, EBITDA rose 13.2% to S$183.4m, while net profit jumped 25.9% to S$92.8m (or 25% of our FY16 estimate). StarHub declared a quarterly dividend of S$0.05/share as guided.

Kept FY16 guidance unchanged

Although service EBITDA margin hit 33.8% in 1Q16, versus 30% in 1Q15, management has kept its 31% guidance for the full-year, suggesting that the first quarter numbers may not be indicative of the performance for the rest of the year.

Nevertheless, management expects service revenue to continue to grow in the low single-digit range, likely supported by its broadband and enterprise businesses. It has also kept its capex payment for this year at 13% of total revenue, excluding the S$80m spectrum payment due in Sep. Lastly, there is no change to its annual dividend of S$0.20/share, or S$0.05/quarter.

Mixed outlook for mobile business

For its main mobile business, StarHub expects the SIM-only plans and the new data upgrade service at a low monthly fee to contribute to a lower subscription and excess data usage revenue; but it still expects monetisation of mobile data from growing data usage and takeup of other value-added services.

It also plans to participate in the upcoming spectrum auction in 2H16. However, it is likely to face increased competition sooner-than-expected, with Circles.Life releasing more details about its pricing plans last night.

Maintain BUY with new S$3.69 fair value

In light of the recent developments, we have revised our FY16 and FY17 estimates slightly; this lowers our DCF-based fair value from S$3.80 to S$3.69. But as there is still a total potential return of nearly 18% from here, we maintain our BUY rating.

Source: OCBC Research - 6 May 2016