Competition to hit StarHub's near-term earnings

SINGAPORE (May 6): Consensus are mostly neutral on StarHub following its results announcement on May 3. The group posted a 14.2% y-o-y drop in its 1Q19 earnings, with revenue increasing 6% y-o-y to $597 million.

The revenue increase was mainly driven by strong segmental revenue contributions from network solutions (+9%) and cyber security services (+41%), which mitigated 5% and 12% lower service revenues from the mobile and Pay TV businesses, respectively.

EBITDA for the quarter increased 4.7% y-o-y, due to the adoption of SFRS 16 and higher margin, but core EPS dropped 7.6% y-o-y due to higher depreciation and effective tax rate.

The group has declared a 2.25 cents cash dividend for 1Q19.

Looking ahead, StarHub says it expects 2019 service revenue to decline 2%.

See: StarHub reports 14.2% lower 1Q earnings of $54 mil due to higher expenses

CGS-CIMB Research is keeping its “hold” call on StarHub with a target price of $1.65, while expecting competition to hit earnings harder from now on.

In a Friday report, analyst Foong Choong Chen says the group’s results were in-line with expectations, but expects weaker 2Q19-4Q19 earnings due to more intense competition as TPG enters the market.

RHB Research is maintaining its “neutral” recommendation on StarHub with a lowered target price of $1.72 from $2.02 previously.

Post results, RHB has lowered its FY19-21F core earnings prediction by 9-11%, mainly to factor in higher losses from the cyber-security arm and SFRS 16 adjustments.

“We believe the sharp share price underperformance YTD has priced in downside risks from competition and concerns over cyber-security losses, with valuations at 2SD below the historical EV/EBITDA mean,” says RHB.

Similarly, Phillip Capital is remaining “neutral” on StarHub with a higher target price of $1.62 from $1.58 previously.

The group’s enterprise business grew 14% y-o-y, with network solutions gaining 9% y-o-y, as it continues to ride on the digitalisation wave.

In a Monday report, analyst Alvin Chia says, “We believe Ensign, StarHub’s cybersecurity arm is gaining traction as it expanded $7.7 million (41% y-o-y) in revenues. It currently accounts for 20% of enterprise revenue or 4% of total revenue. Ensign is currently negative EBITDA $5 million.”

He also believes that the group’s rebranding exercise – Hello Change – is aiding in subscriber growth since it took effect in 4Q18.

Meanwhile, OCBC Investment Research has upgraded its recommendation on StarHub to "hold" from "sell" previously, but maintains the fair value estimate at $1.64.

In a Monday report, analyst Joseph Ng says, "In the mobile space, we note that the group has added 74,000 post-paid subscribers to its customer base, which we believe stems from greater SIM-only take up. Unsurprisingly, this has continued to weigh on ARPU (average revenue per user), which has dropped by $4 y-o-y to $39."

The management expects this trend to continue till the end of 2019.

The group has also expressed that it plans to capture opportunities in the cyber security business, but the timeline as to when it turns EBITDA positive remains unclear.

On the other hand, UOB Kay Hian is more bearish on StarHub as it continues to rate the stock “sell” with a target price of $1.45, as it remains cautious on its near-term challenging outlook.

In a Monday report, lead analyst Chong Lee Len says, “We are cautious on Starhub as we believe it will be adversely affected by the entry of TPG as the fourth mobile operator. Mobile accounted for 35% of its service revenue in 2018. We expect competition and price erosion to worsen post entry of TPG.”

Meanwhile, Maybank Kim Eng Research is more bullish on StarHub as it reiterates it “buy” recommendation on the back of the group’s restructuring theme, but with a lower target price of $2.00 from $2.18 previously.

Based on the update provided by management, StarHub is well into executing on the business restructuring of all its businesses with about 70% of plans in execution.

In a Monday report, analyst Luis Hailado believes that the group’s business restructuring will help stabilise earnings next year and provide the cash-flow to sustain its 9 cents minimum DPS policy.

Even efforts to overhaul the pay TV content cost structure is in its final stage with only one major content provider to be negotiated with.

“Although competition has lowered our profit expectation for this year and next, the restructuring of operations and stronger balance sheet will support the dividend yield, in our view,” says Hilado.

As at 3.35pm, shares in StarHub are trading 1.30% lower at $1.52, or 5.07 times FY19 book with a dividend yield of 5.70%.