Towards Financial Freedom
StarHub - Missing The Grant
StarHub's results missed both the street and our estimates in the absence of a fiber adoption grant in 2Q14, as well as mobile revenueweakness. We cut our FY14/15 forecasts on factoring in the lowered revenue guidance and extended prepaid revenue pressure. This reduces our DCF TP to SGD4.20 (from SGD4.60), based on 7% WACC. Maintain NEUTRAL, with share price support in its fairly attractive dividend yield and under-leveraged balance sheet.
Falling short. StarHub's core earnings missed our and consensus estimates by 8-9% when annualised. The key deviations were: i) the absence of a fiber adoption grant in 2Q14 (booked under other income),which we suspect may be made up for in 2H14, and ii) weaker-thanexpected mobile revenue momentum.
Key 1H highlights. Fixed network revenue remains a bright spot (+2%) but at 16% of overall revenue, it is insufficient to mitigate the pressure faced by its mobile (-0.1% y-o-y), broadband (-15.4%) and pay-TV segments (+1% y-o-y). We remain concerned over the extended prepaid average revenue per user (ARPU) erosion, which led to the 1.4% decline in its 2Q14 mobile revenue. This is behind M1 (M1 SP, BUY, TP: SGD4.30)'s +3.4%, suggesting that its revenue share slipped further.
MVNO route not likely. The company believes the high mobile penetration will not deter new players, although a new entrant would be subject to stringent rollout requirements. It views a partial allocation of spectrum as the most probable route for a new entrant versus the wholesale mobile virtual network operator (MVNO) model.
Forecasts revision. Management has toned down its service revenue guidance from a "low single digit" to "flat" growth, but retained its margin guidance of 32%, implying a larger contraction in FY14 EBITDA. We cut our core earnings forecasts for FY14 and FY15 by 4-6% on lowering our service revenue growth assumptions. We note that StarHub stands to benefit from another SGD100m in fiber adoption grant until end-2015, having booked SGD50m earlier. The key earnings risks are: i) the stronger-than-expected mobile revenue weakness, and ii) higher-thanexpected subscriber acquisition cost (SAC).
Other Results Call Takeaways
Prepaid weakness lingers. StarHub's prepaid business continued to suffer from the lower number of foreign workers permits and recent restrictions on SIM card ownership. The higher smartphone adoption across its prepaid base also contributed to lower voice and SMS usage, with many subscribers turning to free Wi-Fi hot spots and over the top (OTT) applications. Prepaid ARPU fell 12.5% y-o-y in 2Q14 to SGD61 on the back of a 6.3% contraction in its prepaid subs base. To stem the erosion, it is looking to migrate more prepaid customers to postpaid plans.
Managing content cost. Management will continue to explore ways to lower content costs, which have spiralled in recent years. Citing customer analytics based on return ath data obtained from set top boxes, it is able to gauge viewers' interest in specific content to justify its renewal. StarHub is also mindful of piracy and content that is easily available from the internet, which it perceives as offering little unique proposition to customers.
Data monetization. StarHub disclosed that 57% of its postpaid subs are on tiered data plans versus 52% in 1Q14 and 32% in 1Q13. Of this, 18% exceeded their bundled data from 16% in 1Q14. It expects the recent re-pricing of 4G plans (promotion rate of SGD2.14/month) to gradually lift postpaid ARPU as the rate applies to new and out-of-contract customers only.
Falling short. StarHub's core earnings missed our and consensus estimates by 8-9% when annualised. The key deviations were: i) the absence of a fiber adoption grant in 2Q14 (booked under other income),which we suspect may be made up for in 2H14, and ii) weaker-thanexpected mobile revenue momentum.
Key 1H highlights. Fixed network revenue remains a bright spot (+2%) but at 16% of overall revenue, it is insufficient to mitigate the pressure faced by its mobile (-0.1% y-o-y), broadband (-15.4%) and pay-TV segments (+1% y-o-y). We remain concerned over the extended prepaid average revenue per user (ARPU) erosion, which led to the 1.4% decline in its 2Q14 mobile revenue. This is behind M1 (M1 SP, BUY, TP: SGD4.30)'s +3.4%, suggesting that its revenue share slipped further.
MVNO route not likely. The company believes the high mobile penetration will not deter new players, although a new entrant would be subject to stringent rollout requirements. It views a partial allocation of spectrum as the most probable route for a new entrant versus the wholesale mobile virtual network operator (MVNO) model.
Forecasts revision. Management has toned down its service revenue guidance from a "low single digit" to "flat" growth, but retained its margin guidance of 32%, implying a larger contraction in FY14 EBITDA. We cut our core earnings forecasts for FY14 and FY15 by 4-6% on lowering our service revenue growth assumptions. We note that StarHub stands to benefit from another SGD100m in fiber adoption grant until end-2015, having booked SGD50m earlier. The key earnings risks are: i) the stronger-than-expected mobile revenue weakness, and ii) higher-thanexpected subscriber acquisition cost (SAC).
Other Results Call Takeaways
Prepaid weakness lingers. StarHub's prepaid business continued to suffer from the lower number of foreign workers permits and recent restrictions on SIM card ownership. The higher smartphone adoption across its prepaid base also contributed to lower voice and SMS usage, with many subscribers turning to free Wi-Fi hot spots and over the top (OTT) applications. Prepaid ARPU fell 12.5% y-o-y in 2Q14 to SGD61 on the back of a 6.3% contraction in its prepaid subs base. To stem the erosion, it is looking to migrate more prepaid customers to postpaid plans.
Managing content cost. Management will continue to explore ways to lower content costs, which have spiralled in recent years. Citing customer analytics based on return ath data obtained from set top boxes, it is able to gauge viewers' interest in specific content to justify its renewal. StarHub is also mindful of piracy and content that is easily available from the internet, which it perceives as offering little unique proposition to customers.
Data monetization. StarHub disclosed that 57% of its postpaid subs are on tiered data plans versus 52% in 1Q14 and 32% in 1Q13. Of this, 18% exceeded their bundled data from 16% in 1Q14. It expects the recent re-pricing of 4G plans (promotion rate of SGD2.14/month) to gradually lift postpaid ARPU as the rate applies to new and out-of-contract customers only.
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