Our recent visit to StarHub, which revealed no major surprises, renews our concerns over a widening disconnect between its operational outlook and share-price performance.
What's the impact
2014 priorities. Management said StarHub is focusing on: 1) increasing its presence in the enterprise market, 2) customer retention in the mobile segment, and 3) customer service by transforming some of its retail stores.
Dividends. StarHub reaffirmed its current dividend policy; however, given its under-geared balance sheet (2013E net debt/EBITDA ratio of 0.6x), we continue to believe the company could raise its dividend guidance in 2014. We are forecasting a 2014 DPS of
SGD0.21, versus current guidance of SGD0.20.
Capex. Management said the company could incur additional costs in 2014-15 to fund its investment in industrial property (a 60-year leasehold site at Mediapolis to house pay-TV infrastructure and data analytics team). As such, we see upside risk to our 2014 capex forecast (9.4% of sales).
Handset subsidies. Given mature mobile penetration levels, management said it hopes for handset subsidies to decrease. This is partly reflected in our forecasts - we expect 2014 handset subsidies to decline by 3% YoY to SGD238m.
Operations. StarHub said its new range of mobile plans (HD premium) and services (“SmartSupport” insurance) would provide more value to its customers. These plans appear to target voice customers of Singapore Telecom (ST SP, SGD3.56, Hold [3]).
StarHub said the drivers for key segments remain largely unchanged:
1) post-paid mobile customers are migrating onto higher priced tiereddata plans,
2) provisional delays continue to persist in the enterprise market, and
3) price competition in the broadband segment remains intense, though the threat from late entrants (MyRepublic) appears to have receded due to attractive offers from incumbent mobile operators.
Outlook. We remain comfortable with our 2014 forecasts for 3.8% YoY service revenue growth, a 0.3pp YoY EBITDA margin improvement, and 6.8% YoY EPS growth.
What we recommend
We reaffirm our Underperform (4) rating and dividend discount modelbased 6-month target price of SGD3.92. StarHub’s share price rose by 13% in the past year, outpacing the 2% decline in the STI Index. This surprises us as it was achieved against a backdrop of rising interest rates (10-year bond yields increased from 1.3% at January 2013 to 2.54% now) and downward Bloomberg consensus earnings revisions (for 2014). A declaration of a special dividend would be a key risk to our call.
How we differ
We believe that the stock will de-rate in coming months on rich valuations – its 2013E EV/EBITDA is more than 1SD above its past-7-year mean – and that the dividend yield compression theme has fully played out.
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