• STARHUB LTD (SGX:CC3)’s 2018 net profit of S$216m (-20% y-o-y) is below expectations with 4Q18 core net profit coming in weak at S$46.4m. This is a contraction of 62% y-o-y and 65% q-o-q on the back of a declining revenue base and EBITDA margins.
• We cut our 2019 net profit forecast by 13%.
• StarHub paid 16 S cents net DPS for 2018 but is guiding for a 80% sustainable dividend payout into the near future. 2019 will see the company paying 2.25 S cents quarterly net DPS.
• Maintain SELL with a lower DCF-based target price of S$1.45.

4q18 Results

Below expectations.

• STARHUB LTD (SGX:CC3)’s 2018 net profit of S$216m (-20% y-o-y) accounts for 94% of our full year estimate of S$228.5m. 4Q18 core net profit came in weak at S$46.4m. This is a contraction of 62% y-o-y and 65% q-o-q on the back of declining revenue base and EBITDA margins.

Stock Impact

• Mobile service revenue in 4Q18 fell 14% y-o-y due to lower IDD, voice and data usage and higher SIM-only plans. This was partially mitigated by higher roaming charges in the quarter and mobile valued-added services (VAS). There is also higher provision for the customer loyalty programme in the quarter as the redemption rates are expected to increase. Management does not expect the provision to continue into 2019. Excluding this, mobile service revenue would have decreased by 8% y-o-y.
• Post-paid customer base increased 34,000 or 2.5%. Post-paid ARPU fell 11% y-o-y mainly due to lower excess data usage revenue from higher take-up of DataJump and higher data bundled into base plans, higher mix of SIM-Only plans and higher proportion of revenue allocated to equipment revenue and recognised in prior periods. The overall average smartphone data usage increased to 6.1 GB.
• Pre-paid customer base decreased 150,000 due to lower tourist and foreign worker base. ARPU was relatively flat at S$14.

Enterprise Fixed: Delivered double-digit revenue growth.

• Enterprise fixed revenue rose 13% y-o-y and 17% q-o-q to S$146.1m thanks to higher managed service revenue with the consolidation of D’Crypt (consolidated starting Jan 18).

Pay-TV: In secular decline.

• StarHub lost another 14,000 pay-TV subscribers due to competition from alternative content and piracy. In addition, pay-TV ARPU dropped 4% or S$2 y-o-y to S$48 as a result of customer rebates for the cessation of channels, such as the Discovery Channel, Animal Planet and Eurosport.

Residential Broadband: Steady subscriber growth.

• StarHub gained 9,000 broadband subscribers in 4Q18. Subscriber base expanded at a slow but steady pace of 3% y-o-y. ARPU however, fell from S$37 to S$32 and led to a 12% y-o-y drop in residential broadband revenue.

EBITDA fell on lower earnings base and higher marketing expenses.

• As a result of the lower revenue base and higher marketing expenses, 4Q18 EBITDA declined 22% to S$111m on an EBITDA margin of 18%. This also reflects losses from Ensign and D’Crypt, higher provision for customer loyalty programme and additional provisions for a leasing contract relating to the cable network given plans to migrate customers to fibre services. Excluding this, EBITDA margin would be higher at 25% (3Q18: 25%).

Earnings Revision / Risk

• Trimmed 2019 net profit forecast by 13% to account for higher cost of sales and intense price competition to adversely affect mobile service revenue.

New dividend guidance for 2019.

• StarHub proposes a 4 S cents final DPS for 2018. Going forward, the group intends to pay-out at least 80% of profit as dividends (2018: 128% of underlying net profits).
• StarHub intends to pay a quarterly cash dividend of 2.25 S cents vs 4 S cents in 2018. This translates to a net dividend yield of 4.7%.

Valuation / Recommendation

• Maintain SELL with a lowered DCF-based target price of S$1.45/share (COE: 8.75%; terminal growth: 0%).
• We take a cautious outlook on StarHub as we believe that the company will be adversely affected by the entry of TPG as the fourth mobile operator. Mobile accounts for 35% of its service revenue in 2018. We expect competition and price erosion to worsen post entry of TPG.

Source: UOB Kay Hian Research - 18 Feb 2019