Much Is Priced In. Upgrade to BUY

• Even after reducing our forecasts and Target Price, StarHub is offering respectable upside to value investors and thus we upgrade to a BUY with a SGD1.96 DCF-based Target Price (WACC 5.7%, LTG -1%).
• At current levels, StarHub's share price is implying extreme scenarios of pay TV revenues going to zero or that wireless service revenues drop a further c15% from our estimates.
• With the impact of TPG still to be felt we acknowledge short-term risk but believe the stock has more than priced in long-term profit erosion.

Earnings Downgrade From Knock on Effect of Pay TV

With StarHub ending its Discovery Network contract, we factor in a negative impact on the bundled/hubbing revenues in addition to its pay TV business. io.

We believe our revised service revenue CAGR decline of 2% over 2017-20E is fair given the telco will partially mitigate wireless revenue pressure with its recent MVNO contract with unlisted MyRepublic in 2H18 onwards.

Nonetheless, we reduced our 2018E/19E core profit forecasts and Target Price by 4%/5% and 14%, respectively. Our forecasts are generally in line with FactSet consensus estimates.

Value Play. Not An Earnings Recovery Play

We believe StarHub's share price is now discounting an overly drastic drop of both wireless and/or pay TV revenues in the long-term and as such is now offering value to long-term investors.

StarHub 2018E is trading at more than 1SD below its 5 and 10-year mean P/E’s. We anticipate the profit decline from intensifying competition but also expect resurgent FCF following the payment of the 700Mhz frequency license fees in FY19.

Priced for a Worse Case

We acknowledge that the challenges remain for the industry incumbents in the short-term but believe that StarHub is pricing an even worse case scenario.

Key risk to our BUY is a scenario where the incumbents engage in a price war themselves rather than let their MVNOs fight in the low price segment against TPG.

Summary of Assumptions

Wireless service revenues decline by a 4% CAGR over 2017-20E as subscribers utilize MVNO services to ensure they do not exceed their usage caps with the incumbents.

Pay TV revenues fall by 17% CAGR over the same period as online content piracy continues to challenge the business model.

Fixed network and enterprise revenues grow by a 10% CAGR over the period.

As a result, consolidated revenues over the period reduce by 2%.

EBITDA margins to total revenues to decline to 24% in 2020E from 26% in 2017.

Core profit consequently drops by a 14% CAGR over the period.

We have also assumed the fixed DPS starting 2019E will be reduced to SGD0.10 (prospective implied yield of 6%) from SGD0.16 which will enable long-term free cashflow to cover dividend payments. We believe the market is already anticipating a DPS cut. We would not rule out, and would encourage, a shift to a profit ratio based minimum payout rather than a fixed DPS policy. This would avoid concerns of paying dividends beyond net income and the increased leverage that results.

We have assumed the SGD282m license fee for the 700Mhz frequency will be paid in 2019E but this could be further delayed.

Swing Factors 

Upside 

• Potential source of new revenues from Enterprise segment targeting, including government contracts revolving around the Smart Nation initiatives. 

Downside 

• Re-contracting/retention costs rising on the back of new smartphone launches and defensive preparation against TPG’s entry. 
• Further wireless tariff package pressure on rates and/or data allocations possible due to new competition or from incumbents. 
• Material investments in enterprise or content space that may have a lengthy gestation period before realizing returns. 

Source: Maybank Kim Eng Research - 06 Jul 2018