• Revenue and EBITDA beat our expectations. Mobile revenues were higher than forecast. Earnings would have been stronger if we included one-off cost from the provision of cable maintenance and accelerated depreciation.
• Mobile competition turning more rational and ARPU even rebounded in 4Q19. Cybersecurity business surged 37% YoY but still loss-making.
• Starhub continues to make headway in their cost control efforts: 4Q19 staff cost ( -1.6% YoY), operating leases (-44% YoY) and other Opex (-44% YoY).
• Dividends per share maintained at 9 cents in FY19. Guidance for FY20e is to maintain the 9 cents full-year dividend, to be paid on a semi-annual basis. The dividend yield is 5.9%.
• Margin guidance by management was surprisingly more conservative than our forecast (Figure 1). We lowered our EBITDA for FY20e by 3%. However, our free cash-flow estimate was raised by S$100mn due to a cut in the capex guidance. We maintain our ACCUMULATE recommendation. Our TP is raised to S$1.70 (previously S$1.58) as we roll-over to FY20e earnings and peg Starhub’s valuations to 6.5x industry EV/EBITDA.

Positives

+ Mobile revenue was much more stable. Mobile revenue eked a marginal 0.5% QoQ rise in revenues in 4Q19. Mobile revenue appears to be plateauing at the S$190mn per quarter run-rate. This is after the drastic fall from S$220mn per quarter two years ago. Revenue growth was supported by 9,000 rise in postpaid subscribers and modest improvement in postpaid ARPU from S$39 to $40. Pricing by competitors has turned more reasonable. Starhub’s focus is on maintaining high ARPU customers and rather than volume growth.

+ Better than expected cost controls. Cost control was a large driver to EBITDA growth in 4Q19. Total operating cost was down 4.5% YoY. This is after accounting for two one-off items – S$10.9mn provision for submarine cable maintenance and accelerated depreciation of certain IS systems. The largest drop in cost was from operating leases as cable duct were no longer leased (-43.6% YoY). Other expenses also fell 44% YoY from lower license fee and impairment.

Negatives

– Pay TV revenues was a drag on YoY basis . The largest drop in revenue was from pay TV. The migration from cable to fibre saw both ARPU and subscribers falling 12.5% and 19.4% YoY respectively. 4Q19 churn of 18,000 subscribers was at a lower average monthly churn rate of 0.7% compared to prior months (3Q19: 2.2%). There were some customers that delayed their switch to fibre into 4Q19.

Outlook

FY20e revenue outlook will be more stable than the prior year. FY19 was hit by the cable to fibre migration exercise and more intense mobile price competition. Our expectations are for a negative 1% decline (-7.5% FY19) in service revenue in FY20e, excluding cybersecurity.

With core revenues stable, growth will come from cybersecurity. However, profitability in this division will still be languishing as investments are still need in the business. We believe any upside in earnings will be dependent on the management’s ability to further realign cost to the current revenue trajectory. The management track record on cost has so far been enviable.

Other commentaries from the briefing:

1. Mobile: Competition not bottomed out as more MVNOs will be launched. Pricing in the market has been more responsible.
2. PayTV: Customer move to alternatives or even piracy. There has been more stability post-transition to fibre. Still driving cost down and will not accept fixed content cost. More negotiations are underway.
3. Broadband: Pricing has been more aggressive to maintain bundle plans with customers.
4. Cybersecurity: The industry is growing on a double-digit basis. There remains a need to invest in technical and regional capabilities. Services offered are deep security solutions including threat analysis, providing defensive cyber capabilities, etc.

Maintained ACCUMULATE with higher TP of S$1.70 (previously S$1.58)

We maintain our ACCUMULATE recommendation. Our TP is raised to S$1.70 (previously S$1.58) as we roll-over to FY20e and peg Starhub valuations to 6.5x industry EV/EBITDA. 

Source: Phillip Capital Research - 24 Feb 2020