• Revenue met expectations while net profit disappointed by 22%. Net profit was impacted by expanding losses in cybersecurity and one-off expenses in the fibre migration exercise.
• Mobile services revenue performed better than expected. Post-paid and pre-paid ARPU improved alongside with post-paid subscriber growth.
• Cybersecurity service revenue surged 162% YoY, but losses widened.
• Maintain ACCUMULATE with a lower TP of S$1.58 (prev. S$1.62). We revised EBITDA and net profit downwards by 4% and 6% respectively in light of the results.

Positives

+ Mobile performed better than expected.  Mobile service revenue exceeded our forecasts by 9%. Amidst intense competition, ARPU for post-paid and pre-paid improved 2% QoQ and 7% QoQ respectively. Post-paid subscribers expanded by 39,000 QoQ while pre-paid subscribers held steady at 789,000. We believe StarHub’s ability to expand both its subscriber base and improve ARPU is due to the rebranding exercise “Hello Change” (started Dec18) and the introduction of its new SIM-only plan giga! launched this quarter. StarHub was able to enlarge its recurring revenue stream with its simplified mobile plans. There are now 7 Mobile Virtual Network Operators (MVNOs) in Singapore, 3 of which partners with StarHub. We expect the mobile segment to face prolonged competition, as operators attempt to retain its subscriber base upon the full commercial launch of TPG Telecom (TPG) later this year.

+ Cybersecurity posted strong revenue growth.  Revenue surged 37% QoQ / 162% YoY. Although losses widened S$5mn YoY, management expects losses to stabilise with continued efforts in upgrading capabilities to address the growing local and global demands. There were several one-off costs in integrating ensign.  

Negatives

–  Pay-tv churn worsened by cable to fibre migration. Pay-tv revenue declined by 24% YoY. ARPU declined by 8% to S$44. Subscribers contracted by 20,000 QoQ, the steepest decline ever. The decline was made worse by the fibre migration exercise that started last year. The deadline for the migration exercise is extended to Sept 19. We believe most cable customers have moved and such migration cost should taper off in 2H19.

– Enterprise network solutions suffered price erosions. Network solutions were down 4.5% YoY due to the repricing of contracts upon renewals. Corporates used to sign up for higher bandwidth, but as a result of a change in the economic environment, this trend has stopped. Instead, more corporates are seeking discounts. Management stated that the pricing pressure should not last more than two quarters as they foresee growth in data services and reiterated that the enterprise segment is not just connectivity, but an expanded suite of services that can be potentially bundled with cybersecurity services.

Outlook

The S$210mn cost savings initiatives over three years are on track. These savings will flow into investments in cybersecurity and the continued transformation of StarHub’s digital and retail services. We expect further attrition in pay-tv subscribers due to the on-going migration to fibre. We are looking forward to a major renegotiation in content cost by Sep19. We expect the mobile segment to face prolonged competition with the impending entry of TPG later this year. Earnings from the cyber security business should improve; we are awaiting further stability before we make any meaningful upgrades.

Maintain ACCUMULATE with a lower TP of S$1.58 (prev. S$1.62).

We revised EBITDA and net profit downwards by 4% and 6% respectively in light of the results. Our valuation is based on a 6X EV/EBITDA multiple which is a 30% discount to its peers, reflecting the weakness in the mobile and pay-tv business.

Source: Phillip Capital Research - 7 Aug 2019