Target Price Cut by 8%. Maintain BUY on Restructuring Theme

• With slightly weaker-than-expected 1Q19 wireless revenues and the impact of new lease accounting treatment, we cut our 2019E/20E/21E core profit estimates by 13%/13%/10% and DCF-based Target Price 8% to SGD2.00 (WACC 5.7%, LTG -1%).
• Management has made significant progress in STARHUB LTD (SGX:CC3)'s business restructuring which will stabilize earnings next year and provide the cash-flow to sustain its SGD0.09 minimum DPS policy.
• With a healthy 27% upside to our revised Target Price and 5.7% dividend yield, we maintain BUY.
• Risk: irrational competition in the wireless or enterprise space.

Adopting Lower End of Guidance

• StarHub's 1Q19 revenue, EBITDA and core profit were 25%/26%, 26%/28% and 22%/25% of MKE/consensus FY2019. We believe the performance was in line to a slight beat of consensus.
• Although the 1% y-o-y decline in service revenue was in line with our FY19, we note slightly weaker wireless service revenues, most likely due to the internal cannibalisation of traditional post-paid contract plans with the new SIM-only promotions. As such, we reduced our consolidated service revenue to -1.5% (from - 0.9%), which is the lower end of management guidance of flat to -2%.

New Accounting: Boost to EBITDA, Bane to Profit

• New operating lease accounting treatment (SFRS 16) led to the slight EBITDA beat in 1Q19, but it conversely weakened profit partly due to the increase in D&A expense as leases are now capitalised and amortised. Likewise, the notional lease liabilities raise interest expense.
• The combined impact of our revenue revision and the new accounting treatment resulted in the cuts to our core profit estimate and Target Price.

Looking Beyond the Short Term

• Based on the update provided by management, StarHub is well into executing on the business restructuring of all its businesses with 70% of plans in execution. Even efforts to overhaul the pay TV content cost structure is in its final stage with only one major content provider to be negotiated with.
• Although competition has lowered our profit expectation for this year and next, the restructuring of operations and stronger balance sheet will support the dividend yield, in our view.

Source: Maybank Kim Eng Research - 6 May 2019