StarHub Limited – Awaiting further clarity on Ensign May 6, 2019

PSR Recommendation: NEUTRAL Status: Maintained
Last Close Price: S$1.52 Target Price: S$1.620

Positives

+ Growth in enterprise remains in play. The enterprise business grew 14% YoY. Network solutions which comprises of data & internet, managed services and voice services grew S$8.9mn (9% YoY). StarHub continues to ride on the digitalisation wave. There is increased in demand for managed services across key verticals such as government, financial services, hospitality, transport, SMEs and healthcare. We believe Ensign, StarHub’s cybersecurity arm is gaining traction as it expanded S$7.7mn (41% YoY) in revenues. It currently accounts for 20% of enterprise revenue or 4% of total revenue. Ensign is currently negative EBITDA S$5mn.

+ Rebranding materialising. We believe the rebranding exercise (“Hello Change”) is aiding subscriber growths since it took effect in 4Q18. The exercise simplifies mobile plans by removing hidden charges, no-lock in contracts together with higher data allowances. This boosted net post-paid adds to approximately 73,000 YoY this is more than 5 years high for StarHub. We believe StarHub’s MVNO partners MyRepublic and VivoBee contributed to these net-adds as well. Pre-paid subscriber grew by 1,000. Stabilising after four consecutive quarters of decline.

 

Negatives

ARPU to trend lower before stabilising. ARPU declined 5% QoQ to S$39. We expect this trend to continue. SIM-only plans and MVNO contribution have increased is weighting in the post-paid segment. We believe ARPU will come under pressure because of lower excess data charges as consumer pays a fixed fee for higher data allowances. As such, we have modelled in a decline in ARPU in FY19. We expect it to stabilise in 4Q19, as we do need foresee SIM-only plans to grow exponentially. Smartphones are getting costlier causing smartphone replacement cycle to lengthen. We believe SIM-only plans acts as a transitionary mobile plan before consumers take on a new subsidised handset plan.

 

Outlook

Management reiterated future savings from pay-tv content cost with one major renegotiation coming up. Although Ensign is still in its infancy we are awaiting further clarity on its growth. Ensign may be a re-rating catalyst for StarHub when it achieves scale.

 

Maintained Neutral with a higher TP of S$1.62 (prev. S$1.58)

We revised our FY19e EBITDA and NPAT upwards by 1% and 3% respectively due to the results. Remain NEUTRAL with a higher target price of S$1.62 (prev. S$1.58).

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Alvin Chia
Research Analyst
Phillip Securities Research Pte Ltd

Alvin covers telecommunication and technology sector.

He graduated with a bachelor of commerce, majoring in Accounting and Finance from Monash University.

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