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SINGAPORE (May 4): Maybank Kim Eng and OCBC Investment Research UOB Kay Hian are maintaining their “hold” calls on StarHub with an unchanged price target and fair value estimate of $2.27 and $2.20, respectively, while UOB Kay Hian is reiterating its “sell” call on the stock with a target price of $2.25.
This comes after the group on Thursday reported its first set of results under the new SFRS 15 accounting standard, with 1Q18 earnings indicating continued competitive pressure on the wireless and pay TV businesses although this came largely in line with expectations.
The research houses are however maintaining their cautious views on the stock due to headwinds from ongoing competition, as well as expectations of increasing competition ahead in spite of the group’s recently-announced partnership with upcoming MNVO provider MyRepublic.
In a Friday report, Maybank analyst Luis Hilado says the fairly-valued shares of StarHub are likely to “drift” given the uncertainty over future competition, which he believes will intensify in 2H18 and possibly erode the telco’s profitability due to the continued entry of new players with cheaper plans.
The group’s dismal 1Q results support Maybank’s cautious view on the telco sector, he adds, despite an overall sector share price weakness over the past 12 months.
While Hilado acknowledges that the impact of SFRS 15 on contract reporting standards have a part to play in the comparative 1Q17 business segment results, he points out that total 1Q17 revenues, EBITDA, and core net profit are only about 1% lower for StarHub after restatement.
This leaves operating cashflows similar to the initially reported figures, he adds.
“A worse-than-expected competitive environment is the downside risk, while early departure of new competitors offers upside potential to our outlook,” says Hidaldo.
Although OCBC analyst Eugene Chua notes “decent traction” at the Enterprise Fixed business over the latest 1Q, he expects the mobile business to remain under pressure with the impending entry of TPG Telecom.
Nonetheless, the analyst thinks StarHub’s MVNO partnership with MyRepublic could be a positive development for the group given MyRepublic’s already-known presence in Singapore’s broadband space – although there need for further clarity on MVNO partnership agreement before deciding on whether it will benefit the telco going forward.
“It depends on the segment targeted by MyRepublic based on the offerings to be launched, which need to be complementary rather than overlapping in order for Starhub to benefit. If the services offered by MyRepublic are complementary to that of Starhub’s, we expect having MyRepublic as Starhub’s MVNO will help support its post-paid subscriber base and mitigate against significant market share loss upon TPG’s entry,” explains Chua.
After making adjustments to its earnings forecast for StarHub to conform to SFRS 15, UOB’s forward net profit forecast for FY18 and FY19 are revised upwards by 14.6% and 2%, respectively, but its net profit forecast for 2020F goes down by 10.5%.
Highlighting StarHub’s loss of subscribers for both post- and pre-paid mobile over the latest quarter, UOB analyst Jonathan Koh believes its revenue decline from the Pay TV business has become an “entrenched secular trend” which will impact the group’s profits even as Enterprise Fixed remains its main engine for growth.
While the analyst sees StarHub’s dividend yield as attractive at 6.9% for 2018, he thinks this could drop to 5.2% in 2019.
StarHub’s outlook, however, could possibly change when the group’s newly-appointed CEO Peter Kaliaropoulos officially comes on board to launch a strategy refresh around July or August this year.
“Peter was selected due to his strong leadership capabilities beyond conventional frameworks and his understanding of market dynamics in an intensely competitive market environment. He has also led a significant number of acquisitions,” notes Koh.
As at 12:27pm, shares in StarHub are trading 3 cents lower at $2.28 or 13.2 times Maybank’s FY18F estimates.