• Mobile and Pay TV still a drag
• Initiatives would need time
• FV of S$1.92

3Q18 In-line With Our Expectations

Starhub Ltd’s (Starhub) 3Q18 revenue grew 3.0% YoY to S$582.2m, which formed 24.8% of our full-year forecast. This was mainly due to higher revenue from Enterprise Fixed and Sales of Equipment, partially offset by lower revenue from Mobile and Pay TV segments. Excluding Ensign (Systems) and D’Crypt, Enterprise Fixed service revenue would have increased by 4.5% YoY, primarily driven by higher managed services revenue.

Unsurprisingly, Mobile revenue dropped 4.2% YoY, on the back of lower IDD, voice and data usage revenue, lower subscription revenue due to higher phone subsidy given to customers, and a higher mix of SIM-only plans. ARPU dropped from S$48/month in 3Q17 to S$44/month in 3Q18.

Pay TV was hit by a lower subscriber base, as the quarter recorded a net churn of 15k households with large numbers of customers coming out of contract, while ARPU took a hit due to rebates given to customers for cessation of certain channels this year.

All considered, PATMI fell 12.8% YoY to S$57.0m, comprising 25.7% of our full-year forecast. We deem this set of results to be within our expectations.

Positives Not Without Caveats

Starhub has achieved healthy inroads into the Enterprise Fixed space, and we believe that the group would be able to chase business with more complex cybersecurity requirements arising from its recent JV with Temasek, as well as potential upside from the Singapore government’s lifting of its pause on new ICT systems.

However, we believe the effect of the latter might not be as pronounced, given Starhub’s broad base of verticals in its ICT business, in our view. In the Pay TV segment, while we concur with management that a variable cost model would be more sustainable, it remains to be seen if content providers will be amenable to such a change, given that some of them currently enjoy minimum guarantees/prices from Starhub.

Increase FV to S$1.92

Notwithstanding the continued cloudy outlook, we acknowledge the increased group-wide focus on costs as well as management’s desire to push further into the Enterprise business, albeit at the expense of thinner margins. Thus, we reduce our cost of equity assumption, and increase our fair value from S$1.65 to S$1.92.

Source: OCBC Research - 12 Nov 2018