• 9M16 PATMI beat street’s expectations
• Factoring in 4th Telco assumption
• Maintain HOLD with new S$3.30 FV

Broadband the only bright spot in 3Q16

StarHub Ltd’s (StarHub) 3Q16 revenue fell 3.0% YoY to S$585.3m on lower contributions from mobile, pay TV, and enterprise fixed segments as well as lower sale of equipment, but partly offset by revenue growth from its broadband segment. As operating expenses declined at a slower pace of 0.9% YoY to S$479.7m, StarHub’s 3Q16 PATMI decreased 27.6% to S$86.0m. As expected, StarHub declared a quarterly dividend of S$0.05/share, payable on 24 Nov.

For 9M16, revenue fell 2.7% YoY to S$1761.9m, as strong showing from broadband and enterprise fixed segments were offset by weakness from mobile and pay TV segments as well as lower sale of equipment. However, 9M16 operating expenses declined 4.0% YoY to S$1433.1m on lower cost of sales due to lower cost of equipment sold and traffic expenses. Consequently, 9M16 PATMI slipped 1.4% YoY to S$287.4m but beat street’s expectation as it formed ~80.4% of consensus estimates.

4th Telco impact partly mitigated by enterprise fixed segment

Following the submission of Expression of Interest (EOI) documents by three applicants (on 1 Sep) for the New Entrant Spectrum Auction (NESA) to Infocomm Media Development Authority of Singapore (IMDA), we are of the view that a 4th Telco entry is a highly probable scenario. We believe out of the three applicants, MyRepublic and TPG Telcom have the better chance to receive pre-qualifications from IMDA to participate in NESA, of which one will become the 4th Telco. While IMDA is expected to announce its pre-qualification decision by 25 Nov 16, we believe it makes sense to incorporate assumptions to reflect a 4th Telco entry, given this being a highly probable scenario, in our view.

Re-engage closer to S$3.10 or better

With a change in analyst coverage, and new assumptions for 4th Telco entry from FY17 onwards, we lower our terminal growth assumption from 1% to 0.75%, while also updating our other DCF assumptions. Consequently, on weaker earnings outlook over the next five years, our FV decreases from S$3.94 to S$3.30. Maintain HOLD, supported by 5.9% FY16F dividend yield.

Source: OCBC Research - 3 Nov 2016