■ We cut FY19F-20F DPS to a more sustainable S$0.10 p.a. Still decent 6.1% yield.
■ StarHub will pursue cost optimisation in 2H18F. Our scenario analysis shows a sizeable fair value boost if cost cuts are better-than-expected.
■ Enterprise Fixed business may surprise on the upside on bigger-than-expected government contract wins and/or earnings-accretive acquisitions.
■ Key developments to watch:
a) TPG’s service launch by year-end,
b) TPG’s market traction by mid-2019 and
c) more details on cost cuts during 3Q/4Q18 results call. Read More
Upgrade to Add with a lower TP of S$1.85
We upgrade StarHub from Hold to Add, with a 23% lower DCF-based target price of S$1.85 after our FY18F-20F EBITDA/core EPS cuts. This is to factor in weaker-thanexpected 2Q18 results and more conservative mobile ARPU assumptions. Down 63% in the last three years, we believe StarHub’s share price now adequately accounts for the risk of more intense competition from TPG, with potential upside surprise from cost cuts. StarHub is trading in line with its 10-year EV/OpFCF mean in FY20-21F when earnings hit a trough. A downside risk is keener competition.
Manageable downside if ARPU falls steeper than expected
We factored in a bigger 10% p.a. (previously: 5%) impact on FY19F-20F mobile base ARPU (ex-roaming). At S$31 (blend of device-bundled and SIM-only plans) in FY20F, we think it is sufficiently close to an estimated S$25-30 SIM-only ARPU needed by TPG to hit its EBITDA breakeven target in 5-6 years. If the impact is 15% p.a. (FY20F: S$28), StarHub’s fair value is S$1.42, or a potential downside of 7.9% (including dividend yield).
A more sustainable DPS could be S$0.10 p.a.
We cut FY19F-20F DPS to a more sustainable S$0.10 p.a. (previously: S$0.16), factoring in our revised earnings forecasts, 700/2100MHz spectrum payments (FY19F/21F) and buyout of the remaining stake in ASTL/D’Crypt (FY20F/21F). Based on this, StarHub’s net debt/EBITDA rises to a peak of 2.5x by end-FY21F (end-FY17: 1.0x), then eases thereafter. StarHub may also want to keep some cash for potential M&As, in our view.
K-ost revamp will be key
During its 2Q18 results call, the new CEO, Peter K, said
a) there will be no big strategy shifts and
b) StarHub will start pursuing cost optimisation in 2H18F.
We think this makes sense as it is already rightly pursuing growth in the Enterprise Fixed business and, given future revenue pressures, must focus on cost revamp. We currently forecast service opex (ex-depreciation) to fall 3.9% between FY18F-20F. Our scenario analysis shows a fair value of S$1.95/S$2.44 if StarHub can deliver a better-than-expected 5%/10% cut.
Enterprise Fixed could surprise on the upside
We see Enterprise Fixed revenue rising 15.2% yoy in FY18F, boosted by ASTL (full year) and D’Crypt (11 months), then more modest 4.3%/3.9% yoy growth in FY19F/20F. We gather that StarHub has been successful in several government tenders recently and will vie (as part of consortiums) for c.45% of the government’s annual ICT contracts worth S$2.6bn. The Enterprise Fixed business may surprise on the upside on bigger-thanexpected contract wins and/or more earnings-accretive acquisitions.
We expect aggressive promotions from TPG when it launches by year-end, which may keep sentiment on StarHub weak. Thereafter, investors will monitor competition and TPG’s market traction by mid-2019. StarHub’s new CEO may unveil more details on cost cuts in the 3Q/4Q18 results call. A milder-than-feared impact from TPG and the delivery of material cost savings by mid-2019 would be positive for the share price, in our view.
Source : CGSCIMB Research