• 9M17 EBITDA met 84% of our estimate
• Strong enterprise revenue growth in 3Q17
• Expects capex for FY17 to decrease

9M17 Above Expectations

StarHub Ltd’s (StarHub) 3Q17 revenue fell 0.8% YoY to S$580.4m but would have been worse if not for the 11.3% growth in the enterprise fixed business, while operating expenses grew 0.4% YoY at S$481.8m on higher depreciation and amortization. Consequently, 3Q17 EBITDA and PATMI declined 1.7% and 11.5% YoY to S$176.0m and S$76.2m, respectively.

For 9M17, revenue fell 0.6% YoY to S$1751.7m, as growth from enterprise fixed (+5.0%) and sales of equipment (+5.8%) were offset by mobile (- 0.8%), pay TV (-7.7%) and broadband (-1.8%). 9M17 operating expenses increased 1.0% to S$1447.7m, mainly due to higher cost of equipment sold and higher cost of services but partly offset by lower staff costs and marketing and promotions costs.

Consequently, coupled with lower income grant and higher operating expenses, core 9M17 PATMI (excludes one-time S$9.5m gain in 2Q16 and S$0.7m loss in 3Q17 for investment in mm2 Asia), fell 15.2% YoY to S$235.6m. 9M17 EBITDA also declined 6.7% YoY to S$517.0m and met ~84.3% of our estimate. EBITDA margin was 2.0ppt YoY lower at 31.8%.

4Q17 to Drag EBITDA Margin Down on Higher Subsidies

Looking ahead, we expect: 1) FY17F service revenue to be flat, 2) EBITDA margin on service revenue to be between 26-28%, and 3) cash capex to decrease to 13% of total revenue (excluding any spectrum payments) compared to previous guidance of 10%. While 9M17 EBITDA margin was higher at 31.8% relative to its guidance, management guided that they expect higher handset subsidies in 4Q17. Mobile and Pay TV continues to be under pressure from new entrant and alternative viewing platforms, respectively.

Wait for More Consistent Performance From Enterprise Segment

As we expect weaker 4Q17 results, we opt to keep our forecasts largely unchanged for now despite above expectations 9M17 performance. In addition, while enterprise segment seems to be gaining traction as it ramps up on its ICTrelated business with a suite of solutions offered, we prefer to wait for consistent performance before reviewing this segment’s ability to offset weakness from the mobile and PayTV segments. Hence, maintain SELL with FV of S$2.30.

Source: OCBC Research - 3 Nov 2017