StarHub expensive despite attractive dividend as outlook ‘abysmal,’ DBS says

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Shares of StarHub are trading at a premium valuation despite its bottom line being on a “downward spiral” amid an “abysmal outlook,” DBS said in a note on Monday.

“The counter is expensive despite an attractive 7 percent dividend yield,” DBS said. “We expect StarHub’s mobile and Pay TV revenues to
deteriorate further in 2018-19 owing to rising competitive pressures. StarHub’s mobile revenue trends have been much weaker than its peer M1 reflecting the need for improved execution.”

It noted the stock is trading at an “expensive” forward price-to-earnings ratio of 17 times and an enterprise value to EBITDA ratio of 9 times, compared with sector averages of 12 times and 7 times respectively. EBITDA stands for earnings before interest, taxes, depreciation and amortization.

StarHub reported last week that its net profit after tax for the first quarter fell 13 percent on-year to S$63 million, while total revenue fell 4.7 percent on-year to S$561.0 million, mainly on lower revenue from mobile and pay TV services, coupled with lower equipment sales.

DBS said StarHub’s partnership with MyRepublic for a Mobile Virtual Network Operator (MVNO) could offer some stability to StarHub’s declining mobile revenue, but it wanted more clarity on MyRepublic’s strategy and effective execution of the StarHub partnership.

StarHub’s “hubbing” strategy of bundling mobile, broadband and pay TV services is also facing pressure, DBS noted, with more customers downgrading their number of services despite losing discounts.

“As this is a critical success factor for StarHub, there could be near term impact on the company’s share price as the structural decline is unlikely to reverse,” DBS said.

DBS kept a Fully Valued call on the stock, but cut its target price to S$2.05 from S$2.20.

It tipped a bull case target price of S$2.64, which assumes Singapore’s fourth telco entrant TPG sees limited uptake, while StarHub’s fixed-line segment sees strong growth. For its bear case scenario of a strong TPG uptake and poor growth in StarHub’s enterprise segment, its target price is S$1.86.

Shares of StarHub ended Monday down 1.31 percent at S$2.26.