Starhub – DBSV
Broadband, prepaid mobile decline
- 3Q14 net profit of S$ 97.7m (+2.5% y-o-y, +4% q-oq) was 3% below our expectations
- Service revenue growth weak on lower broadband, prepaid revenue
- 5Scts interim dividend declared, in line with expectations.
- Maintain HOLD with unchanged TP of S$4.30
Revenue impacted by broadband, prepaid mobile
- Competition contributed to the continued decline in broadband revenues which fell 4.0% q-o-q. Prepaid revenues were impacted by SIM ownership restrictions. However, overall revenues were boosted (+2% y-o-y, +3 qo-q) by higher handset sales.
Profitability improved by grant income
- Despite being impacted by lower revenue levels, higher adoption grant income led to a q-o-q improvement in the bottom-line. However, profit margins are likely to decrease in 4Q14 with higher handset sales expected.
Price competition in fixed broadband
- Competition in fixed broadband is eroding Average Revenue Per User (ARPU) for StarHub, resulting in lower earnings. The decline in ARPU is unlikely to reverse in the near term with StarHub likely to pursue its current strategy to preserve market share.
Postpaid to support mobile revenue
- Postpaid growth is likely to support the mobile segment despite weaker prepaid revenue. With higher portion of consumers moving to tiered data plans, postpaid ARPU is likely to see further improvement.
Given healthy cash generation, we use discounted cash flow valuation (WACC 6.5%, terminal growth 0%) to derive a target price of S$4.30. Besides mid single digit growth, the stock offers FY14F yield of 4.8%.
Decline in mobile roaming
- A potential decline in mobile roaming could offset the gains from mobile data-repricing and broadband margins may decline sharper than expected.