Yahoo Finance 
Investor CentralStarHub Ltd - MANAGEMENT REPLY: Has broadband ARPU bottomed out - which of the brokers is right?
22/6/2015 – StarHub expects FY15 revenue to grow in low single digits while the EBITDA margin will be about 32% of Service revenue.
Capital expenditure is expected at 13% of total revenue.
It also intends to maintain annual cash dividend payout of 20 cents per share for FY15.
EBITDA margin, capex and dividend guidance were similar to FY14.
Maybank Research believes StarHub will be able to compete with a fourth telecom operator, set to launch in a few years.
But bearish brokers have maintained a Neutral call as they do not expect any revenue momentum in the near term.
The company just announced earnings for Q1 FY15:
Revenue: +8% to S$618 mln
Profit: -12% to S$74 mln
Cash flow from operations: S$50.1 mln vs S$171.9 mln
Dividend: 5 cents per share vs 5 cents per share
Revenue increased due to higher equipment sales.
However, service revenue was lower by 1% at S$540 mln mainly due to lower broadband revenue.
The lower service revenue and higher handset subsidies impacted profitability for the quarter.
Bullish analyst report
Maybank Research says StarHub lead the sector in capturing unusually strong iPhone 6 demand.
Normally, iPhone demand tapers off in the first quarter after a peak in the fourth quarter.
This was not the case this year, likely because iPhone 6 marked a major change in form factor.
The analyst views StaHub’s decision positively despite the earnings miss.
Its higher subsidy costs now should translate into better-quality earnings in the future, says Maybank.
Specifically, it sees two benefits.
One, StarHub now has 24,000 more postpaid subscribers that it can up-sell more services to.
Two, it has locked them into two-year contracts, fortifying its subscriber base before the new entrant breaks in.
There was also progress in broadband.
Although broadband revenue fell 11% YoY, it gained 0.8% from Q4 FY14, the first stabilisation seen since MyRepublic entered the market with its low-cost plans.
This is in line with the analyst's expectations.
The House expects flat broadband revenue for 2015, after two years of slippage.
Hence, it maintained a BUY call with a target price of S$5.
It reduced FY15 EPS by 1% but raised FY16-FY17 by 1%.
This reflects a transfer of benefits down the line with strategic implications, likely made with the new entrant in mind.
Catalysts could come from a broadband turnaround and a benign BPL outcome.
OCBC Research says the intense competition in the broadband space was the main reason for the muted showing.
Although StarHub managed to add another 4,000 new subscribers in the quarter, ARPU was stuck at S$33/month, suggesting that subscribers continued to take up the lower price plans.
However, the House believes that the worst could be over as it does not envision the basic plans falling below S$30/month.
In addition, EBITDA margin guidance at 32% of service revenue suggests that it expects sequential improvement in the next few quarters.
The analyst has opted to keep forecasts unchanged for now as it expects stronger QoQ improvements in H2 FY15.
Hence, it maintain a HOLD rating with an unchanged fair value of S$4.17.
Bearish analyst report
RHB Research trimmed StarHub's FY15-16 core earnings forecasts by 3% to 6%, mainly to reflect the weaker mobile revenue momentum and margins.
As a result, it lowered the target price from S$4.20 to S$4.00 while maintaining a NEUTRAL rating.
It further says that StarHub lacks re-rating catalysts.
The erosion in its mobile revenue share and the challenging prospects of its broadband business remain a concern.
The share price support comes from its fairly attractive recurring 4.7% dividend yield.
Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.
1. Has broadband ARPU bottomed out?
Since MyRepublic entered the market in January 2014, monthly industry ARPUs have fallen from S$45-S$50 to S$35.
At that time, it had made its debut with a S$49.99 1Gbps plan when incumbents only offered 100Mbps plans at that price and uncompetitive 1Gbps plans.
However, the incumbents have since caught up with their own competitive 1Gbps plans with strong differentiating features.
Broadband revenue appears to have stabilised, with the first positive QoQ growth in eight quarters on steady ARPU of S$33/month.
It grew 0.8% QoQ but fell 10.8% YoY to S$48.1 mln.
Maybank Research believes that industry pricing has bottomed and revenue will stabilise.
OCBC Research also believes that worst could be over as it does not expect basic plans to fall below S$30/month.
Management Reply: In 1Q-2015, we saw the first positive quarterly growth in our Broadband revenue when compared to 4Q-2014. We have continued to grow our broadband customer base by 21,500 customers compared to a year ago; bringing the total to 473,000 customers. Additionally, our proactive retention programs and promotional service bundles have kept our churn rate low at 0.8%. All these signs point to a brighter outlook for us.
2. Should investors be concerned about StarHub's first negative free cash flow quarter? Is this the start of a trend?
StarHub has not reported a negative free cash flow quarter at least since 2007.
But Q1 FY15 broke this trend.
It reported a negative free cash flow of S$46 mln.
The reasons cited were lower cash flow from operating activities and higher capex payments in Q1.
Management Reply: Free cash flow was at a deficit of $46.3 million for the quarter. The unfavourable year-on-year change was attributed to lower cash flow from operating activities and higher CAPEX payments.
The lower cash flow from operating activities was a result of the strong demand for new smartphones which drove handsets sales higher and consequently the cost of equipment sold increased 79.6% to $157.0 million in 1Q-2015. Higher CAPEX payments were due to some spill over in payments for projects completed in 4Q-2014.
In both instances, we have guided that the cost of equipment sold is expected to remain at around the FY-2014 figure and cash CAPEX is expected to be about 13% of total FY-2015 revenue; suggesting that both items would be managed in subsequent quarters.
(Read the full story to get all 7 questions)
We thank Eric Loh, AVP – Investor Relations, for his response.
Legal notice
While our purpose is to ask the questions which the man on the street would ask, and to help the everyday investor make informed investments, please note that:
Our reports and presentations ('our contents') are not investment advice nor should they be construed as investment advice or any recommendation of any kind; nor meant to cast allegations or insinuations of any kind against any individuals or entities. Before acting on the material in our contents, you should either seek independent advice tailored to your particular circumstances and intentions or rely on your own judgement.
Our reports and presentations express our observations, opinions and theoretical analysis based on the facts that we have gathered or have been provided to us. While we endeavour to ensure that our contents are accurate and are presented in good faith, we cannot and do not warrant the accuracy, adequacy or completeness of the material or that the material is suitable for its intended use; and we disclaim any such warranties express or implied that may be presumed by any party; neither do we take responsibility for the views of companies or other stakeholders or observers or sources quoted or hyperlinked in our contents. While every precaution has been taken in the preparation of our contents, we (and our principals) shall not be liable for any losses or damage or inconveniences due allegedly to errors or omissions in any facts or due allegedly to reliance on our contents in any way whatsoever; nor for any damage to any computer hardware, date information or materials allegedly caused by our contents.
All expressions of opinion and observations in our contents are subject to change without notice and we do not undertake a duty to update and supplement our contents or the information contained herein in the event we obtain any further or more complete information.
©2015 Investor Central® - a service of Hong Bao Media
