• 1Q17 within expectations
• Revenue growth driven by handset sales
• 4 S-cents dividend for the quarter

1Q17 EBITDA Formed 26% of Our FY17 Estimate

Starhub Ltd’s (Starhub) 1Q17 results came in within our expectations as revenue rose 0.2% YoY to S$592.3m, driven mainly by higher sale of equipment (+13.7%) and enterprise fixed segment (+2.9%) but offset by lower mobile (- 0.6%) and Pay TV (-6.8%) segments. 1Q17 operating expenses grew at a faster pace of 2.6%, mainly driven by higher cost of equipment sold due to higher revenue from handset sales and higher cost of services because of growth in enterprise fixed segment, but this was offset by lower staff costs from the reversal of accruals and favourable foreign exchange gains.

Consequently, coupled with lower income grants, 1Q17 EBITDA and PATMI fell 12.4% YoY and 21.3% to S$160.7m and S$73.1m, which formed 25.9% and 24.5% of our FY17 estimates, respectively. 1Q17 EBITDA margin came in at 3.9ppt YoY lower to 29.9%.

No Change to Outlook Guidance

There was no change to management guidance 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). Starhub also declared an interim quarterly dividend of 4.0 S-cents for 1Q17 and intend to pay a quarterly cash dividend of 4.0 Scents for FY17.

In our view, there is a lack of near-term catalysts for Starhub: 1) mobile outlook remains weak with intensifying competition, 2) pressure from over-the-top (OTT) services and piracy on Pay TV are expected to persist, and 3) competition in broadband segment is set to increase as we expect TPG to enter this market as well. One bright spot will be the expected steady single-digit growth from its enterprise fixed segment.

Factoring in Assumptions of Spectrum Payments

Having secured 60Mhz of spectrum at the recent auction at a total price of S$349.6m, we incorporate the following assumptions for spectrum payments: 1) S$67.6m in FY17 and 2) S$282m in FY18. Consequently, as we also adjust for lower EBITDA margins beyond FY18, our DCF-based FV decreases from S$2.50 to S$2.40. Maintain SELL on Starhub.

Source: OCBC Research - 4 May 2017