• Under expectations; same headwinds
• More pressure in network solutions
• Lower FV of S$1.52

Beneath Expectations

Starhub’s 2Q19 results came in under our expectations. Revenue fell 7.4% YoY to S$552.8m, due to lower revenue from Mobile, Pay TV, Broadband and Sales of equipment, though partially mitigated by higher Enterprise Business revenue. Still, we note that in the latter segment, Network solutions fell 4.2% YoY while Cyber security services grew by 161.4% YoY.

Post-paid mobile ARPU fell S$5 from S$45 in 2Q18 to S$40 to 2Q19; while this was a S$1 increase from 1Q19, we believe this was in part due to seasonality. Excluding the impact of SFRS (I) 16, service EBITDA margin for 2Q19 would have been 27.7%, or a 2.5 ppts YoY drop.

We note that losses from the group’s Cyber security services were S$0.9m in 2Q19, compared to the S$11.4m booked in 1Q19. PATMI for 2Q19 came in at S$39.5m, or 20.3% of our full-year forecast. We note that the effects of losses from Cyber security services and fibre migration costs reduced NPAT in 1H19 from S$108 to S$89m. Management has declared a DPS of 2.25 S-cents for 2Q19, unchanged from that declared in 1Q19.

Tough Days Still

On the mobile business, competition does not seem to be abating, with potential entry of even more MVNOs in 2H19 (read: lower ARPUs). Pay-TV continues to register significant revenue weakness (-23% YoY), though some of this could be attributed to the on-going migration process as well as other available options.

On the enterprise side, there are signs that there is now increasing competition in the network solutions business, not just from a range of players (e.g. telcos, international organisations, system integrators), but also from re-contracting customers looking for greater value on existing price points or looking for straight-up discounts.

Management has maintained its guidance of stable to 2% decline in service revenue for FY19. With service revenue down 3.1% YoY in 1H19, management expects its Cyber security business to help arrest revenue declines in the other segments.

We keep our FY19E earnings estimate, but cut our forecast for FY20 by ~5.1% and reduce our terminal growth assumption from 1.5% to 1.25% as we adopt a more conservative posture, given how headwinds remain unabating. Thus, our FV drops from S$1.64 to S$1.52.

Source: OCBC Research - 7 Aug 2019