• We expect fees to have been marginally down by 1.8% q-o-q but up 1.2% y-o-y at S$693m.
• High net worth clients turned more risk averse, resulting in weakness in wealth management fees, which was offset by decent growth from credit cards.

Street FY19F/20F Earnings Projections Have Bottomed Out

The street is overly concerned about profitability of new businesses and under estimating the magnitude of cost savings over FY18- 20. The street is also missing out on an annual cost savings of ~S$30m due to shutdown of StarHub’s co-axial cable network after 2020.

Besides, the street is not paying attention to potential network sharing which may further boost free cash flow. 

StarHub is attractive near -2SD of its historical EV/EBITDA and PE average and offers sustainable yield exceeding ~5.5%.

Where We Differ: We Expect the Street to Raise FY19F/20F EPS by 10%/20% Over the Next Few Months

FY19F street earnings are likely to be raised S$20m from

• We expect fees to have been marginally down by 1.8% q-o-q but up 1.2% y-o-y at S$693m.
• High net worth clients turned more risk averse, resulting in weakness in wealth management fees, which was offset by decent growth from credit cards.

StarHub may ramp up hiring in the Cybersecurity business but the impact should be low given smaller size of the business.

FY20F street earnings are likely to benefit from

• We expect fees to have been marginally down by 1.8% q-o-q but up 1.2% y-o-y at S$693m.
• High net worth clients turned more risk averse, resulting in weakness in wealth management fees, which was offset by decent growth from credit cards.

Potential Catalyst

News on TPG’s launch, updates on network sharing and the transformation programme. Official confirmation of delay in TPG’s commercial launch from late 2018 to early 2019, more clarity on network sharing and quarterly updates on the transformation programme.

Valuation

Maintain BUY with an unrevised Target Price of S$2.45. 

We use DFC (WACC 7%, terminal growth 0.5%) to drive our Target Price and project FY19F dividend yield of 5.6%.

Key Risks to Our View

Bear-case valuation is S$1.75 if TPG causes severe disruption. StarHub could see a 3% drop in FY19F EBITDA under this scenario vs our base case of stable EBITDA.

Network sharing among existing telcos could lead to bull-case valuation of S$2.92. StarHub could save ~20% of the projected capex from FY19F onwards under this scenario.

Source: DBS Research - 16 Oct 2018