StarHub - Mixed results

■ 3Q15 results beat on cost control and one-off items

■ Revenue pressures remain our key concern

Reiterate Underperform (4) rating with a lower target price

What's new:
StarHub’s 3Q15 results confirm that the company has managed to fix some of its past problems (weak broadband and fixed-line revenue), but with overall revenue momentum continuing to underwhelm our expectations, due to underperformance in the mobile segment, we reiterate our Underperform (4) rating on the stock.

What's the impact:
StarHub reported a 21.5% YoY increase in its 3Q15 net profit on a 1.0% YoY rise in service revenue and a 1.1pp YoY increase in the service EBITDA margin. While service revenue missed our forecast by 2%, EBITDA surpassed our expectations by 3%, as the service EBITDA margin rose by 1.1pp to 35.7%. In addition, due to the company booking one-time gains (SGD15m) from the deconsolidation of a subsidiary, its 3Q15 net profit beat our forecast by 19%.

Solid cost control continues to be one of the key highlights of the results. In particular, marketing costs (down by 17% YoY) were once again kept in check, which the company attributed to lower retention spending (seasonal) and positive effects of its investments in data analytics (structural factor). But the company’s guidance (it reaffirmed 2015 service EBITDA guidance at around 32%) suggests a significant uptick in operational expenses in 4Q15, implying a sharp increase in handset subsidies.

The central issue for StarHub continues to be the weak revenue-growth outlook. While some of the past issues surrounding its broadband and fixed-line divisions appear to have been addressed, industry-wide weakness in the mobile segment appears to have trumped these positives. This is also reflected in the company softening its 2015 service-revenue guidance to ‘similar level as 2014’ from ‘low-single-digit growth’. Overall, we lower our 2015-17E service revenue by 0.6-2.1%. Accordingly, we cut our 2015-17E EPS by 0.7-4.8%.

Technical Analysis
Daily Chart
What we recommend:
Driven by changes in our EPS forecasts and costof-equity assumption (8.6% vs. 8.0%, driven partly by a 30bps YTD increase in 10-year bond yields), we lower our 12-month DDM-based target price to SGD3.28 (previously SGD3.40). We reaffirm our Underperform (4) rating. The declaration of a special dividend would be the key risk to our call.

How we differ:
Unlike some in the market, we believe the shares will be derated in coming months, as we think the dividend-yield compression theme has played out fully. (Read Report)

Read Related Reports
1) Starhub - Two key challenges by DBS Group Research, published on 9 November 2015

2) Starhub - Progress Where It Matters by Maybank Kim Eng Research, published on 9 November 2015

3) StarHub Ltd - 3Q15 results in line; maintain BUY‏ by OCBC Investment Research, published on 9 November 2015

4) StarHub - Fixed Network Services Claim Second Spot‏ by RHB Research, published on 9 November 2015

5) Starhub - 3Q15 within expectations by CIMB Research, published on 6 November 2015

6) Starhub Ltd - 3Q15: In-line results; IDA decision on 900MHz next key catalyst by Credit Suisse Asia Pacific Equity Research, published on 6 November 2015

7) Starhub - 3Q15 - Steady results; Enterprise gains momentum by Deutsche Bank Markets Research, published on 6 November 2015

Source : Daiwa Capital Markets

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