Even after reducing our forecasts and TP (Fig 1), StarHub is offering respectable upside to value investors and thus we upgrade to a BUY with a SGD1.96 DCF (WACC 5.7%, LTG -1%) based TP. At current levels, the share price is implying extreme scenarios of pay TV revenues going to zero or that wireless service revenues drop a further c15% from our estimates. With the impact of TPG (TPM AU, Not Rated) still to be felt we acknowledge short-term risk but believe the stock has more than priced in long-term profit erosion. Read More
Earnings downgrade from knock on effect of pay TV
With StarHub ending its Discovery Network contract, we factor in a negative impact on the bundled/hubbing revenues in addition to its pay TV business. We believe our revised service revenue CAGR decline of 2% over 2017-20E is fair given the telco will partially mitigate wireless revenue pressure with its recent MVNO contract with unlisted MyRepublic in 2H18 onwards. Nonetheless, we reduced our 2018E/19E core profit forecasts and TP by 4%/5% and 14%, respectively. Our forecasts are generally in line with FactSet consensus estimates.
Value play. Not an earnings recovery play.
We believe the share price is now discounting an overly drastic drop of both wireless and/or pay TV revenues in the long-term and as such is now offering value to long-term investors. StarHub 2018E is trading at more than 1SD below its 5 and 10-year mean P/E’s (Fig 4-5). We anticipate the profit decline from intensifying competition but also expect resurgent FCF following the payment of the 700Mhz frequency license fees in FY19.
We acknowledge that the challenges remain for the industry incumbents in the short-term but believe that StarHub is pricing an even worse case scenario. Key risk to our BUY is a scenario where the incumbents engage in a price war themselves rather than let their MVNOs fight in the low price segment against TPG.
Source : Maybank Kim Eng Research