OCBC upgraded StarHub to Hold from Sell after the stock’s around 20 percent selloff so far this year.
“We believe StarHub’s share price in the near-term will be supported by a decent 7.0 percent forward yield,” OCBC said in a note on Tuesday. It kept its fair value unchanged at S$2.20.
OCBC also noted that the telco will be adopting new accounting standards for revenue recognition this year, with a “full retrospective” approach used for active contracts signed since the beginning of 2017.
“The mobile business will be the most impacted by this change in accounting standard,” OCBC said.
It noted that StarHub has been recognizing an upfront loss from the sale of subsidized equipment when contracts are signed, while recovering that cost over the 24 months of the contract through the monthly subscription fees.
“In short, Starhub currently records upfront the handset cost but not the revenue,” it said, but noted that the telco will be switching to the standard, which calls for recognizing both the cost of equipment and the revenue upfront.
“At the time of entering a 24-month contract with a customer bundled with a subsidized equipment purchase, Starhub will recognize a profit or loss on the sale of the equipment based on the standalone selling price of the phone (i.e. adjusted market price) less cost of equipment,” it said. “Starhub will then strip out the equipment revenue from the monthly subscription price (average revenue per user or ARPU) and record the remainder as monthly revenue over the next 24 months.”
That means StarHub is likely to also see higher EBITDA (earnings before interest, taxes, depreciation, and amortization) margins, OCBC said.
But it noted the change doesn’t have a recurring cash flow impact, although it may change tax payable for this year.
StarHub shares ended Tuesday down 0.44 percent at S$2.27.