• StarHub's 1Q20 net profit of S$40.2m (-26% y-o-y, +15% q-o-q) formed ~25% of our FY20F forecast. Cybersecurity turned profitable, offsetting Mobile & Pay TV weakness.
• FY20F guidance scrapped till 2Q20F. Half yearly dividend to be paid for 1H20F.
• StarHub open to mobile sector consolidation in Singapore and acquisitions in the enterprise space.

StarHub Reports 1Q20 Net Profit of S$40.2m (-26% Y-o-y, +15% Q-o-q)

• StarHub (SGX:CC3)'s 1Q20 net profit of S$40.2m (-26% y-o-y, +15% q-o-q) was in-line due to Cybersecurity’s surprise operating profit of S$5m.
• Cybersecurity revenue rose sharply to S$62.4m (+137% y-o-y, +41% q-o-q), generating an operating profit of ~S$5m (from S$10.5m loss in 4Q19) vs. our expectations of S$5-6m loss.
• On the other hand, mobile revenue of S$163.5m (-15% y-o-y, -10% q-o-q) was 4-5% below our forecast.
• Pay TV revenue of S$46.8m (-34% yo-y, -17% q-o-q) was 12-13% below our expectations due to various promotions.

Mobile revenue is a critical factor for the stock

• StarHub's mobile revenue is a critical factor for the stock and majority of the weakness can be attributed to COVID-19 and less to competition. Mobile revenue weakness was due to post-paid average revenue per user (ARPU) declining to S$34 from S$40 in 4Q19. This can be explained by a sharper-than-expected drop in roaming revenue that comprises 15-20% of mobile revenue. Inbound tourists declined 80% q-o-q in 1Q20, which might be similar for outbound tourists in our view, thus explaining most of the mobile revenue weakness. Besides, high competition with post-paid subscribers switching to cheaper SIM only plans was the key reason.
• However, with TPG beginning to charge its free customers now, existing players including StarHub might benefit in our view. TPG is unprofitable and left without a nationwide-5G licence now. TPG needs to decide to put more capex in an unprofitable business or exit the business in our view.
• Management mentioned that it would compete in the low-end customer segment also and is open to consolidation opportunities in the mobile sector.

2Q20F will be impacted more but will be mostly offset by government support.

• While March was the worst-hit quarter in 1Q20, 2Q20F will be impacted by weaker mobile revenue in April and May 2020. However, with co-funding of salaries by the government, StarHub stands to gain S$10m-12m in one-off benefits in 2Q20F in our estimation.
• We like StarHub as it is trading at a 12-month forward dividend yield of 6.0%, below its average of 6.3%. We project StarHub to maintain a DPS of 9Scts as the company should be able to save capex from its joint investment with M1 on a 5G network. StarHub’s gearing is one of the lowest in the region and the company could benefit from potential consolidation in the sector post-5G licence award.

Maintain BUY With Target Price of S$1.75

• Our DCF-based valuation (WACC 7.4%, terminal growth 1.0%) results in a Target Price of S$1.75 for StarHub.
• Our Target Price translates into a 6.9x 12-month forward EV/EBITDA, a 10% premium to 6.3x regional average – reflecting StarHub’s fixed dividend commitment and future capex savings from a joint 5G network.

Source: DBS Research - 8 May 2020