SINGAPORE (Feb 6): Market watchers have turned pessimistic on the outlook for StarHub, after the telco announced that it would cut distributions per unit by 20% for FY17 as operating expenses for its main mobile business continue to climb.
OCBC Investment Research’s analysts Eugene Chua and Low Pei Han downgraded the stock to a “sell” with a fair value of S$2.65. The pair noted that StarHub’s 4QFY16 revenue had risen 0.2% to S$634.8 million due to higher service revenue, but operating expenses rose faster at 2.7% to S$570.7 million. Coupled with lower income grants and higher handset subsidies, quarterly earnings fell 33.2% to S$54 million.
For the full year, revenue fell 1.9% to S$2.4 billion, on lower mobile revenue, and full year earnings fell 8.3% to S$341.4 million.
“In our view, the operating environment is set to intensify with TPG entering as the 4th Telco in a saturated Singapore market, and we forecast for declining mobile revenue to persist,” said Chua and Low in a note on Monday.
The real issue appears to be StarHub’s guidance for the coming years, says Maybank Kim Eng’s analyst Gregory Yap. While revenue is expected to remain stable in FY17, its costs are expected to be “structurally higher”, particularly in areas relating to staff costs as the telco plans to invest further on its customer service differentiation, and content costs owing to the strong US dollar.
“We have highlighted USD cost of content as a risk before,” said Yap in a note on Monday, adding that the two areas would contribute expenses amounting to 30% of revenue, in contrast to the capital expenditure that will amount to 13% of revenue.
Another major hurdle for the telco could come from TPG Telecom’s earlier-than-expected entry into the market. StarHub’s management told analysts that TPG would only enter the mobile market in 2018, but could enter the market earlier in areas like broadband. “We believe part of management’s motivation to invest heavily in service and content differentiation this year, even to the extent of reducing dividends, is related to this potential threat,” explained Yap, who added that TPG’s intentions, would be known if it participated in the General Spectrum Auction to be held in March.
Maybank Kim Eng has downgraded the stock to a “sell” with a lower target price of S$2.49 from S$3.52 previously.
With StarHub’s cautious guidance and its 20% cut in DPU to 4 Singapore cents for FY17, UBS’ analysts are now anticipating a de-rating of its shares as investor worry about its dividend sustainability. The brokerage cut StarHub’s earnings forecast by 12% to 15% over the next two years and maintained its “sell” rating on the local telco with a lowered target price from S$3 to S$2.50.
In fact, StarHub is about to face a test of the efficacy of its hubbing strategy, according to RHB Research’s Singapore research team. As RHB explains it, more than 60% of StarHub’s service revenue comes from its mobile and broadband businesses which would face potential competition from TPG. “We think the downside risk to earnings should be mitigated by the ability to bundle its mobile service with pay-TV and fixed broadband — which helps in customer retention,” said the brokerage.
Morgan Stanley’s analysts Mark Goodridge and Alvin Lim further highlighted that StarHub had not furbished additional details on its network sharing deal with M1 and is maintaining their underweight rating on the stock with a lower target price from S$2.60 to S$2.40.
“Our view is that network sharing will have no near-term savings impact from opex or capex,” said the pair. They point out that both telcos have 100% coverage in Singapore and would enjoy little in coverage extension savings. They would also not be able to share the utility of a new spectrum, as the next new spectrum band to be made available — 700 MHz — does not yet have a definitive timeline for its availability. “5G, the new technology upgrade, should be a genuine saving for M1 – but it is a 2020 story. Hence, capex will mostly be deployed in 2019 onwards,” said Goodridge and Lim.
To be sure, a bright spot remains for StarHub in its enterprise fixed broadband business. As the second largest revenue contributor after the mobile business, with comparable margins, RHB believes the segment could help to mitigate the pressure on overall earnings.
In fact, the segment’s revenue grew by 3.9% in FY16, and is expected to continue growing by 8.3% over the next three years, on the back of increased demand for smart services and the Internet of Things, data analytics, cloud and cyber security solutions, said RHB in a note on Monday.
Shares in StarHub are trading 19 Singapore cents lower at S$2.81 on Monday.