[FIDES ASSETS: STARHUB – SGX]
29th May 2019
Action: Maintain SELL for STARHUB (STH SP) listed on SGX
StarHub is a telecommunications company with its operations mainly in Singapore. With an existing market capital of SGD$2.7b , this stock has seen better days. As of today, the 52-week high is at SGD$2.05, and 52-week low of SGD$1.480 which is the current price per share.
Target price: SGD$1.460
Upside: -7% (close approx.)
The company’s first quarter results proves to be in line with our expectations. However, with an impending fourth or fifth player (circles life, TPG and redONE), we would suggest taking an extremely cautious stand on its outlook.
The net profit of StarHub in first quarter 2019 has declined by approximately 13% year-on-year to SGD$54m. This is a contribution of a 4.8% year-on-year fall in mobile service gross earnings, an reported operating loss of SGD$15.7m (approx.) from cybersecurity services and increased depreciation. We have projected Starhub’s 2019 net profit to be in the ballpark of $201m previously and 1Q2019 results corroborate this projection. The company’s stability should not cause much volatility in its earnings – with an estimated 3.5% decrease at best. We also project a service EBITDA margin of 28% – 33% for 2019. Additionally, an interim dividend of SGD$0.0225 cents was declared recently, with an announcement to pay out at least 75% profits as dividends. We maintain a SELL position as the company faces a challenging outlook in the near future.
Mobile Service Revenue
This segment of Starhub’s business fell 4.8%(approx.) year-on-year and 1.2% (approx.) quarter-on-quarter cause by lower international direct dialing, voice and data usage, and value-added services (VAS) earnings. This number was already mitigated by an increase in plans subscription and enterprise short message service (SMS) earnings. StarHub owns an estimate of 25% of Singapore’s mobile services market.
StarHub lost another 12,000 – 15,000 purchase-television subscribers due to competition from alternative content (I.e. Netflix, Amazon) and piracy (BitTorrent). The average revenue per user (ARPU) also decreased by 6% year-on-year to SGD$48 as causes by promotional offers to direct migration of existing cable TV subscribers to internet protocol television (IPTV).
First Quarter 2019 EBITDA
Starhub’s overall EBITDA and service EBITDA margin has increased to SGD$156m (approx.), which is a +2% year-on-year, which essentially is a +41% quarter-on-quarter. Service EBITDA was also higher at 34% (approx.) as compared to 31% first quarter 2019 and 23% fourth quarter 2018. This was mainly impacted by Singapore Financial Reporting Standards (I) (SFRS) 16 leases where operational lease are now capitalised as assets and amortised over the asset lifespan. If SFRS was excluded, service EBITDA for first quarter 2019 would have been 30% instead of 31% (approx.).
Fides Assets’ Recommendation
As we project that StarHub will be likely to maintain a net profit of SGD$201m for 2019, a non-high-volatile service EBITDA margin of 28% – 33% and a quarterly dividend of SGD$0.0225 for 2019 or at least 75% approximately (whichever is greater).
We maintain a SELL action with a target price of SGD$1.460 (calculated based on DCF methodology). We are extremely cautious on StarHub as it is highly foreseeable that the company will be adversely affected by the entry of additional mobile operators such as TPG or Circles Life. As mobile accounted for 35% of StarHub’s derive revenue in 2018, its expected that competition and price erosions to turn worse post entry of competitors.
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*** This report is neither an offer nor the solicitation of an offer to sell or purchase any investment. Comments are based on information obtained from sources believed to be reliable but Fides Assets makes no representation and accepts no responsibility or liability as to its completeness or accuracy.