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%).

Upgrade to HOLD on valuation

• Hit S$4.02 low recently
  
• Yield is more attractive
  
• Upgrade to HOLD
  

5% slide post 2Q14 results

StarHub Ltd’s share price has seen a decline of as much as 5% after the telco posted a 6% YoY fall in 2Q14 earnings (still just 0.6% shy of our forecast), as well as lowering its FY14 service revenue guidance from single-digit growth to maintain at about 2013’s level (although it has maintained its service EBITDA margin at 32%). As mentioned in our post-results report, the move came as no surprise to us as we were already poised to pare our estimates should its broadband outlook not improve.

Upgrade to HOLD on valuation ground

Also in our previous report, we said that we would revisit the stock closer to S$4 as the yield would recover back to 5%. And true enough, StarHub recently hit a low of S$4.02. While the stock has recovered somewhat since then, we believe that at current price, its yield is still the most attractive among the three telcos. Although we are retaining our DCF-based fair value at S$3.81, we upgrade our call from Sell to HOLD on valuation ground; this as we also do not expect local interest rates to see a sharp jump in the near- to medium-term.

Prospects remain muted for now

Having said that, we note that the prospects for StarHub remains muted. Besides the still intense competition in the broadband space, the pretty saturated Pay TV space, we believe that the road to lifting mobile ARPUs is likely to be a long one, despite efforts by the telcos to monetize data usage via tiered pricing plans. A recent research by Adobe1 found that as WiFi becomes more available and a lot of mobile plans become more penalizing, people are learning how to switch over to WiFi on their phones. It added that “the telcos through their data plans are essentially teaching people how to avoid mobile data charges.”

Mobile star dimming

• 2Q14 results below, revenue guidance cut. Downgrade our least preferred telco to HOLD from BUY. TP cut to SGD4.44 (DCF, WACC 7.8%).
  
• Sharp slowdown in mobile revenue growth as fall in voice/SMS offset data growth.
  
• Broadband’s revenue free fall unlikely to end soon.
  

Below expectations

2Q14 profit fell 6% YoY as service revenue slipped 2% on lower prepaid mobile and broadband revenue, and lower NBN adoption grants. Of greater concern was the sharp slowdown in its postpaid mobile revenue growth to 0.8% YoY (vs M1’s +5.4%). We cut FY14E EPS by 4% to assume no YoY growth, as StarHub slashed guidance from low-single-digit growth to flat revenue. It maintained its EBITDA margin guidance of 32% (1H14: 33%) as it expects the new iPhone to depress 2H14 margins. Downgrade to HOLD with reduced DCF-derived TP of SGD4.44 (WACC 7.8%, LTG 1%).

Almost no growth in mobile revenue

While StarHub’s bundle-sharing SharePlus plans also diluted its postpaid ARPU to SGD68 (2Q13: SGD72), the main reason for its depressed mobile revenue appears to be sharply declining voice revenue (-12% YoY). This offset strong data monetisation (tiered subs +25 ppt YoY to 57%. In contrast, M1’s voice decline was less steep (-5% YoY) while its data monetisation rate was stronger (+32 ppt to 58%). OTT apps are hurting the whole industry but StarHub seems to be struggling more to stem the decline in its traditional revenue streams.

Broadband pain to be prolonged

2Q14 broadband revenue also fell sharply by 17% YoY as ARPU declined further to SGD37 (2Q13: SGD45). This is unlikely to end soon as StarHub intends to build up its subscriber base further as part of its home-hubbing strategy.