Stahub – CIMB

No real change in course

StarHub’s 9M14 core net profit largely met expectations, forming 75% of our and consensus full-year forecasts. Service revenue was flat qoq, held back by another quarter of declines for broadband, while EBITDA margin improved due to a higher recognition of NBN grants in the quarter. As expected, a quarterly DPS of S$0.05 was declared. We maintain our Hold rating with an unchanged DCF-based target price of S$4.25 (WACC: 7.1%). Despite a brighter outlook for its mobile business, its broadband business could remain under pressure while the pay TV business lacks growth prospects. We also do not expect StarHub to raise its annual DPS of S$0.20 or pay any special dividends over the next three years due to high capex and spectrum payments.

Broadband ARPU slides further

Broadband revenues fell by 3.5% qoq (-17.4% yoy) in 3Q14, its fifth consecutive quarter of decline. This was driven by a 5.4% drop in ARPU to S$35, its lowest level so far, on the back of intense competition. While management noted that recent competition has centred around higher-speed packages (e.g. 1Gbps for S$49/month), we believe that StarHub’s ARPU could remain under pressure as it defends its higher-end broadband customer base. We forecast ARPU to decline to S$37/32/30 in FY14/15/16.

Weak prepaid offsetting positive postpaid trend

Mobile revenues were largely flat qoq as growth in postpaid was offset by the continued weakness in prepaid, where data usage growth has been insufficient in offsetting the reduced International Direct Dial (IDD) calls and SMS volumes. For postpaid, subscribers grew by 0.9% qoq, while ARPU rose by 1.5% qoq. Subscribers on tiered pricing plans rose by 2% pts qoq to 59%, while users that exceeded their data bundles jumped 4% pts qoq to 22%.

Margins to take a dip in 4Q14 due to higher handset sales

Despite higher handset subsidies in 3Q14, EBITDA margin (on service revenue) rose by 0.6% pts qoq (+0.9% pts yoy). This was only because StarHub recognised higher NBN adoption grants of S$12m in the quarter (2Q14: zero) after receiving regulatory approval. We expect margins to take a dip in 4Q14 on substantially higher handset subsidies due to the full quarter impact of iPhone 6 sales (vs. two weeks in 3Q14). This should bring full-year EBITDA margins (on service revenue) down to our projected 33.1% (9M14: 33.7%).

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