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Morningstar | Weak Trends Continue for StarHub in 2Q with Bundling Strategy Unbundling. See Updated Analyst Note from 07 Aug 2018

StarHub's second-quarter 2018 was below our expectations and the company's weak guidance for 2018. We retain our thesis that the company's profits will remain under pressure for at least the next two years due to increased mobile competition and secular decline of pay TV negatively impacting on StarHub's traditional bundling strategy. Second-quarter services revenue increased by 0.7% with EBITDA down 10.4% and net profit down 21.6% following first-quarter declines of 1.4%, 4.8%, and 15%, respectively. We reduce our long-term forecasts mainly in the pay TV segment and reduce our fair value estimate to SGD 1.80 per share from SGD 2.10 per share. We make no change to our narrow moat rating on StarHub based on cost advantage and efficient scale, with the company continuing to earn returns above its cost of capital despite expectations for ROIC to fall from 21% in 2015 to 10% in 2018 before recovering to 11% in 2022 compared with a 7.9% WACC. The fall in forecast returns, due primarily to the introduction of a new entrant into the mobile market in 2018 and the secular decline of the company's pay TV service due to over-the-top video services such as Netflix and pirated video content, drive our negative moat trend rating.

StarHub's mobile business saw second-quarter services revenue decline by 6.6% compared with M1's 3.8% increase during the same period. This follows its 7.1% decline in the first quarter, compared with M1's 2.6% increase. StarHub's mobile revenue decline was attributed to lower international, voice and excess data usage revenue, lower plan subscription revenue driven by a higher mix of SIM Only plans and lower subscriber base, coupled with higher amortisation of contract assets. StarHub seems to be losing revenue share to M1 with the problems in its pay TV business likely impacting on its mobile business.

The mobile virtual network operator partnership signed with Internet service provider, MyRepublic in May 2018 may well have helped StarHub slightly. M1 has been selling some services via another mobile virtual network operator, Circles.Life since May 2016, which seems to have been helping its revenue. Like other markets in Asia Singapore is seeing a mobile data usage explosion with monthly data usage per customer growing to 5.5 GB this quarter from 4.9 GB in the first quarter. StarHub is also trialing the bundling electricity services with Sunseap which it hopes can reduce churn by increasing the number of services in the bundle.

StarHub's pay TV also continued its decline with customers falling by 11,000 over the quarter to 438,000, having declined from 545,000 at the peak in the first half of 2015. Netflix was launched at the beginning of 2016 and Singapore has a high rate of fibre broadband connections with video piracy also reportedly very high. StarHub's pay TV revenue declined by 4.8% in second quarter, despite the World Cup presumably helping the second quarter compared with 2017's full-year rate of 7.6% which was itself a deterioration on the 3.4% decline seen in 2016. Pay TV has been one of the bedrocks of StarHub's bundling, or "hubbing" strategy driving high value broadband and mobile customers to the StarHub platform. A long-term demise of pay TV would be more negative for StarHub than for the other two Singapore telecom operators, and this seems to be playing out over the past year or so with StarHub also underperforming on fixed line broadband. StarHub's total broadband customers have increased by 4,000 over the past 12 months compared with M1 which has added 24,000 over the same period. One of StarHub's issues here is that it is losing cable modem customers while adding fibre customers but even its net fibre customer adds of 20,000 trail M1's.

We note that in March, TPG provided an update on its Singapore mobile network progress and launched its first mobile plan aimed at the seniors' market. While the company had only spent AUD 30 million on mobile network capital expenditure as at end January 2018, TPG management indicated that it was on target to meet its license requirement to build out a nationwide outdoor service network by the end of 2018. The mobile plan will be targeted at seniors over the age of 65 and will offer free 3GB of data per month, free unlimited calls to mobiles and a free SIM. No details were provided on what other charges would be levied for things like data usage over 3GB and calls to fixed-line phones. Based on population statistics, we estimate this plan would be available to around 9% of the population or around 490,000 potential customers. We would expect that it would be very attractive to many of those customers who may get largely free mobile service for two years. It appears that Singapore, which was a cozy telecom oligopoly a couple of years ago, is becoming much more competitive which is good news for telecom customers but not investors.