• FY17 NPAT missed but EBITDA in-line
• Enterprise fixed a bright spot but not enough
• Weak FY18 outlook

FY17 NPAT Suffered on Higher Expenses

StarHub Ltd’s (StarHub) 4Q17 revenue rose 2.2% YoY to S$649.0m, driven by Enterprise Fixed (+21%) and sales of equipment (+14%), but operating expenses grew at a faster pace of 9.3% to S$624.0m on higher cost for premium handsets, higher managed services and fibre broadband cost. Consequently, 4Q17 EBITDA and PATMI plunged 28.6% and 74.0% YoY to S$96.8m and S$14.1m, respectively.

For FY17, revenue was flat at S$2400.7m, as growth from Enterprise Fixed (+9%) and sales of equipment (+9%) were dragged by broadband (-1%) and Pay TV (-8%) and mobile (-2%). In addition, FY17 operating expenses grew 3.4% to S$2071.6m mainly on similar reasons as 4Q17. Consequently, on lower service revenue and income grant, FY17 PATMI declined 27.1% to S$249.0m, and formed 86% of our NPAT estimate.

FY17 EBITDA met our expectations as it fell 11.0% to S$613.9m and formed ~101% of our estimate. EBITDA margin also fell 3.3ppt to 27.9%.

EBITDA Margin and Service Revenue to Decline Further in FY18

For FY18, Starhub guided for: 1) FY18 service revenue to fall YoY by 1% to 3%, 2) EBITDA margin on service revenue to be between 24-26% (FY17: 28%) before SFRS(I) 15 adoption, 3) cash capex to be ~11% of total revenue (excludes spectrum payments), and 4) a quarterly cash dividend of 4.0 S-cents per ordinary share. In our view, these guidance are reflective of the challenges Starhub’s traditional businesses are facing in an intensifying competitive landscape.

Telecom Sector Sees No Respite

While Enterprise Fixed is gaining good traction with double digit revenue growth in 4Q17 as it ramps up on its ICT-related business with a suite of solutions offered, we do not expect it to more than offset the tremdendous pressures on other traditional businesses ahead given the increased competition in the telecom industry.

Furthermore, we expect balance sheet to be materially weaker post-payment of its spectrum commitment of S$282m though there is no definite timeline for now. All considered, we adjust downwards our estimates, roll-forward our valuations, and reduce our FV from S$2.30 to S$2.20.

Source: OCBC Research - 15 Feb 2018