• Dragged by mobile and Pay TV segments
• Lower expectations for FY17 dividend
• Downgrade to SELL

FY16 missed expectations

StarHub Ltd’s (StarHub) 4Q16 revenue rose 0.2% YoY to S$634.8m, driven by higher service revenue but offset by lower sale of equipment, while operating expenses grew at a faster pace of 2.7% to S$570.7m. Consequently, coupled with higher subsidies on handsets sold and lower income grant, 4Q16 EBITDA and PATMI plunged 13.6% and 33.2% YoY to S$135.7m and S$54.0m, respectively.

For FY16, revenue fell 1.9% to S$2396.7m, as strong showing from broadband (+8.2%) and enterprise fixed (+3.9%) were dragged by mobile (-2.0%), pay TV (-3.4%) and lower sale of equipment (-17.9%). However, operating expenses declined 2.2% to S$1433.1m mainly due to lower cost of equipment sold and lower traffic expenses but partly offset by higher staff costs and licence fees.

Consequently, on lower service revenue and income grant, FY16 PATMI fell 8.3% to S$341.4m. FY16 EBITDA missed our expecatations as it slipped 3.2% to S$690.1m and formed ~95.3% of our estimate. EBITDA margin also fell 1.0ppt to 31.2%.

Guided for even lower EBITDA margin in FY17

While Starhub maintained its quarterly S$0.05/share dividend in FY16, it intends to reduce its quarterly dividend to S$0.04/share in FY17. Management also guided for FY17: 1) service revenue to be at about FY16 level, 2) EBITDA margin on service revenue to be between 26-28%, and 3) cash capex to be about 13% of total revenue (excluding any spectrum payments). In our view, the operating environment is set to intensify with TPG entering as the 4th Telco in a saturated Singapore market, and we forecast for declining mobile revenue to persist. Enterprise fixed remains the only key bright spot ahead but it is largely hinged upon Starhub’s ability to accelerate the growth in this segment.

Downgrade to SELL on lower FV of S$2.65

On aforementioned reasons, we cut our FY17F/18F EBITDA by 17.2% /16.4% and lower our terminal growth rate from 0.75% to 0.50%. Consequently our DCF-based FV decreases from S$3.05 to S$2.65. Downgrade Starhub from HOLD to SELL as we see no near-term catalyst. Its expected dividend cut (first since FY09) also does not bode well for a dividend yield stock.

Source: OCBC Research - 6 Feb 2017