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Morningstar | Weak Trends Continue for StarHub in 3Q With Cost Reduction Used to Fight Back. See Updated Analyst Note from 12 Nov 2018

StarHub’s third quarter 2018 was broadly in line with our expectations and the company’s 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 StarHub’s traditional bundling strategy. Second-quarter services revenue decreased by 1.5% with EBITDA down 9.8% and net profit down 12.8%. We retain our long-term forecasts and our fair value estimate of SGD 1.80 per share and would advise investors to wait for a better entry opportunity. 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. An aggressive cost reduction strategy to remove SGD 210 million in costs over the next three years has been implemented to try an offset the revenue pressures.

StarHub’s mobile business saw third-quarter services revenue decline by 4.2% compared with declines of 5.3% for SingTel and 0.6% for M1 during the same period. Starhub seems to be losing revenue share to M1 with the problems in its pay-TV business likely impacting on its mobile business. Aggressive MVNOs are also damaging pricing in the market. Like other markets in Asia, Singapore is seeing a mobile data usage explosion with monthly data usage per customer growing to 5.9 GB this quarter from 4.5 GB a year ago.

StarHub’s pay TV also continued its decline with customers falling by 15,000 over the quarter to 423,000, 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 in Singapore with video piracy also reportedly very high. StarHub’s pay-TV revenue declined by 14.1% in second quarter, compared with 2017’s full-year rate of 7.6%. StarHub management admitted that the business model “was broken” with content producers going direct to customers over the Internet but still expecting Pay TV providers to sign onto fixed deals for content. Once the pay-TV providers are able to switch their deals to reasonable, variable deals, then they could compete against the over-the-top providers. StarHub’s total broadband customers have increased by 7,000 over the past 12 months compared with M1 which has added 22,000 over the same period. One of StarHub’s issues here is that it is losing cable modem customers while adding fibre customers.