Profit Pressure Priced In; Offers Compelling Value

• STARHUB LTD (SGX:CC3)’s 9M19 core profit is tracking MKE and consensus estimates. We maintain our forecasts and DCF-based Target Price of SGD2.00 (WACC 5.7%, LTG - 1%). See StarHub Share Price; StarHub Target Price.
• Our BUY is premised on the stock already pricing in earnings pressure at our base case scenario and that the cashflows generated by the business offer deep value at current share price levels.
• Any signs of industry repair would be the key catalyst to a re-rating.
• Irrational competition in its various revenue segments is the key risk to the outlook for the sector.

Results Reflect Continued, But Expected, Pressure

• Compared to MKE/consensus, StarHub's 9M19 total revenues were 74%/74%, EBITDA 77%/81% and core profit for 77%/83%. Industry restructuring pressure continued to impact pay TV and broadband revenue q-o-q, while wireless and fixed network revenues saw a rebound. See StarHub Announcements.
• Overall, we believe EBITDA and core profits were in line to a slight beat of expectations. This as the 4Q is seasonally weaker on the EBITDA and profit side given the height of equipment re-contracting related costs. Also, management indicated the final pay TV revenue impact will be in 4Q.
• Reported profit was boosted by an exceptional SGD9m tunnel fee from TPG.

Wireless – Glimmer of Hope But Also New Risks

• Although wireless service revenues were down 2% q-o-q, the wireless division performance was lifted by equipment sales. To recall, as of 2018 SFRS 15 on contract accounting reclassified part of service contract revenue as equipment revenue.
• The combined wireless revenue segments grew 8% q-o-q and potentially imply successful retention efforts. However, management remains cautious on the competitive environment given there appears to be more MVNOs lining up to join the currently 12-brand market.

Guidance Revisions

• Although management lowered its full-year service revenue guidance to a 2% to 3% decline (from 0% to 2% decline), free cashflow will benefit from a reduction in capex to sales guidance to 8% to 9% (from 11% to 12%).
• Our service revenue forecasts are in line with such guidance but we have not reduced our capex forecasts as eventually 5G capex will come to bear.

Source: Maybank Kim Eng Research - 6 Nov 2019