• Revenue and NPAT met expectations. Excluding S$9mn one-off tunnel income from TPG, NPAT would have missed our estimates by 3%.
• Mobile segment relatively resilient considering competition and substantial churn from single enterprise customer.
• Enterprise revenue grew 16% YoY boosted by cyber-security which spiked 135% YoY.
• Expect pay-tv business to stabilise in FY20e because of steadier subscriber base.
• Maintained ACCUMULATE with an unchanged TP S$1.58. No changes to our estimates.

Positives

+ Expect pay-tv business to stabilise in FY20e. Pay-tv revenue is down 25% YoY, ARPU has gone through an 18% decline to cope with the attrition of subscribers to Over-The-Top (OTT) players. We think StarHub has hit the bottom of subscriber attrition accelerated by the cable to fibre migration exercise. We expect stability as newly converted subscribers are locked into a 2-year contract. We also expect ARPU to improve with time as promotional initiatives expire. Management highlighted that majority of its content cost have been renegotiated to a variable cost model, and will not hesitate to substitute content which insists to be on a fixed cost model.  As of 3Q19, pay-tv contributes ~10% of total revenue.

+ Mobile revenue resilient considering the competition. The mobile segment did relatively well considering the highly competitive environment and the huge churn it received this quarter. Post-paid subscriber declined by 35,000 QoQ due to single enterprise customer exiting the market. Mobile service revenue declined 11% YoY/ 1% QoQ vs our estimate (-14% YoY/ -4% QoQ). We view that an earlier commercial launch of TPG Telecom (TPG) will be better for the market as it removes uncertainty.

Outlook

Management revised FY19e service revenue guidance downwards from 0% to -2% YoY to -2% to -3% YoY and reduced CAPEX commitment guidance from 11% to 12% of total revenue to 8% to 9% of total revenue. We expect single-digit CAPEX for 4G (maintenance) and double-digit CAPEX for the upcoming 5G roll-out. 3Q19 results were boosted by an exceptional S$9mn on tunnel fee from TPG. These fees are recognised when TPG enters into an agreement with the other Mobile Network Operators (MNOs) to share the cost of existing 4G tunnel infrastructure. 60% of the cost programme initiatives have been executed, current net savings stands at S$174mn, and the remaining S$36mn has been reinvested into the business. We expect the cyber-security business to and sale of equipment to offset weakness in the consumer segment for the next quarter.

Maintained ACCUMULATE with an unchanged TP of S$1.58

Our valuation is based on a 6X EV/EBITDA. We are awaiting sustainable profits of the cyber-security business before we make any meaningful upgrade.

Source: Phillip Capital Research - 6 Nov 2019