• StarHub's 3Q19 core EPS beat expectations due to lower-than-expected cost.
• Strong fixed enterprise revenue growth; mobile was relatively resilient q-o-q.
• Upgrade from Hold to ADD; DCF-based target price maintained at S$1.65.

3Q19 Results Beat Expectations; 2.25 Scts DPS Was in Line

• STARHUB LTD (SGX:CC3)'s 3Q19 normalised EBITDA (ex-one off TPG fees) rose 9.9% y-o-y (+10.4% q-o-q) due to SFRS 16 adoption and greater handset profits. Ex-SFRS 16, normalised EBITDA dipped 3.6% y-o-y (+10.6% q-o-q) on lower service revenue. See StarHub Announcements.
• Core EPS fell 11.4% y-o-y (+27.9% q-o-q). 9M19 core EPS beat expectations at 99% of our FY19F forecasts (79% of Bloomberg consensus). Key variance: lower-than-expected cost.
• StarHub's 3Q19 DPS was in-line at 2.25 Scts (3Q18: 4 Scts). See StarHub Dividend History.
• StarHub now guides for FY19 service revenue decline of 2- 3% y-o-y (previously: 0-2% decline) and 8-9% capex-to-sales (previously: 11-12%).

Mobile was relatively resilient q-o-q; Strong fixed enterprise growth

• StarHub's 3Q19 mobile service revenue fell 11.0% y-o-y to S$190m on the back of lower IDD/voice/excess data usage revenues. q-o-q, it was down slightly by 1.2% and has been relatively resilient since 4Q18 (S$194m). Pay TV and broadband revenue slid a further 24.8% y-o-y (-13.3% q-o-q) and 7.7% y-o-y (-4.2% q-o-q), respectively.
• StarHub guides for revenues to stabilise from 1Q20 with the majority of subs locked in to two-year contracts. Meanwhile, fixed enterprise revenue grew by 16.8% y-o-y (+3.7% q-o-q), led by cyber security (+135% y-o-y) and managed services (+5.6% y-o-y) growth.

Lower Cost Helped to Support Service EBITDA Margin

• 3Q19 normalised service EBITDA margin rose 4.4% pts y-o-y (-1.3% pt q-o-q) to 33.1%, largely due to the adoption of SFRS 16, lower staff (lower headcounts), content and traffic costs. Ex-SFRS 16, margins eased marginally by 0.2% pt y-o-y.

FY19-21F Core EPS Raised on Lower Opex & Spectrum Amortisation

• We raise our FY19/20/21F core EPS by 22.3%/66.0%/26.5% to factor in lower opex (including savings from the termination of a network lease agreement with Singtel from FY20) and the removal of 700MHz spectrum amortisation (uncertainty over licence commencement).
• Post-revision, we project core EPS to fall by a milder 18.0%/15.2%/22.5% y-o-y in FY19/20/21F due to intense mobile competition.

Upgrade to ADD; DCF-based Target Price Retained at S$1.65

• Despite higher earnings forecasts, we keep our DCF-based Target Price of S$1.65 (WACC: 6.7%), as we have also factored in 5G spectrum and network rollout capex from FY21 onwards.
• We upgrade StarHub from Hold to ADD as management is executing well on its opex/capex savings initiatives. This should help to buffer against adverse revenue effects from TPG’s entry, which should give investors greater confidence on earnings delivery and act as a re-rating catalyst.
• StarHub’s FY20F EV/OpFCF of 9.7x is now at a 33% discount to the ASEAN telco average.
• Downside risk: worse-than-expected competition.

Source: CGS-CIMB Research - 6 Nov 2019