Poor segment performance & competition still a drag on StarHub's earnings, say analysts

SINGAPORE (Feb 18): RHB Research and UOB Kay Hian are maintaining their “neutral” and “sell” calls on StarHub with target prices of $2.02 and $1.45, respectively.

Meanwhile, Phillip Capital has downgraded its rating on StarHub to “neutral” from “accumulate” with a lower target price of $1.58 compared to $1.88 previously.

This comes after the telco concluded FY18 with 26.2% lower earnings of $201.5 million and announced a final dividend of 4 cents.

The group also announced it intends to fully transition into a variable payout of at least 80% of core earnings from FY20, with its management having guided for a FY19 total payout of 9 cents, below the 16 cents paid out in the last two years.

In a report last Friday, RHB says it believes its new FY20F EV/EBITDA of 6.1 times, which is 1.5 standard deviation points below its historical mean, now factors in the stiff mobile competition and headwinds plaguing the pay-TV and broadband businesses.

With 4Q18 headline earnings come in line with expectations, the research house has raised its FY19-21F core earnings by 1-7% after adjusting for SFRS 15 and housekeeping.

In particular, RHB sees StarHub’s enterprise fixed business as the key growth driver going forward – but is less optimistic on prospects for the pay-TV business.

“Pay-TV revenue has contracted for the 15th successive quarter due to over-the-top substitution and privacy. APRU slipped to $49 in FY18 (versus $51 in FY17),” notes the research house.

On the other hand, UOB is reiterating its cautious stance on StarHub on the belief that it will be adversely affected by the entry of TPG Telecom as the fourth mobile operator.

“Mobile accounts for 35% of its service revenue in 2018. We expected competition and price erosion to worsen post entry of TPG,” says UOB analyst Chong Lee Len in a Monday report.

Chong estimates StarHub’s revised quarterly cash dividend of 2.25 cents for 2019, versus 4 cents in 2018, to translate to a net dividend yield of 4.7%.

As such, the analyst has cut 2019 net profit forecasts by 13% to account for higher cost of sales and intense price competition, which is expected to affect mobile service revenue adversely.

Post the release of StarHub’s 4Q results, Phillip Capital analyst Alvin Chia has revised its FY19E EBITDA and net profit estimates down by 12% and 16%, respectively.

In his view, the revenue declines from StarHub’s mobile, pay-TV and sales of equipment businesses were a “triple whammy” for the telco over 4Q – with a “dismal” number of post-paid mobile customers for the quarter compared to its competitors M1 and Singtel.

Nonetheless, Chia thinks the change in dividend policy may be positive for StarHub in the long run as it puts less strain on the group’s balance sheet, and allows additional resources to be channeled into the enterprise segment.

“That being said, management have affirmed that they are not turning their back on the consumer segment, but [intend] to manage for better yield through cost optimisation and retention of high value customers. We expect cost of services to increase as the migration of HFC customers to fibre continues. The pay-TV segment could see a change in cost structure as there are content contracts up for renewal that will change from fixed to variable,” says Chia.

As at 1:01pm, shares in StarHub are down by 5 cents at $1.62 to imply a FY19E yield of 5.4% according to Phillip estimates.