CGS-CIMB upgraded Starhub to Add from Hold, pointing to the stock’s more than 60 percent decline over the past three years as pricing in negatives, including the entry of fourth telecom player TPG into the Singapore market.
“We believe StarHub’s share price now adequately accounts for the risk of more intense competition from TPG, with potential upside surprise from cost cuts,” it said in a note this week. “StarHub will pursue cost optimisation in the second half of 2018. Our scenario analysis shows a sizeable fair value boost if cost cuts are better than expected.”
But it cut its target price to S$1.85 from S$2.40 after lowering its earnings forecasts.
It cut its 2018-20 earnings before interest, tax, depreciation and amortization (ebitda) forecasts by 5-10 percent, and its core earnings per share (EPS) for that period by 10-30 percent after weaker-than-expected second-quarter results and on more conservative mobile average revenue per user (ARPU) assumptions.
StarHub reported earlier this month that second quarter net profit fell 22.8 percent on-year to S$61.7 million, despite a revenue increase, as the contribution from the higher-margin mobile segment decreased.
The brokerage said Starhub’s enterprise fixed segment could surprise on the upside and it forecast its revenue rising 15.2 percent on-year in the 2018 fiscal year, boosted by ASTL and D’Crypt contributions, followed by a more modest 3.9-4.3 percent revenue rise over 2019-2020.
“We gather that StarHub has been successful in several government tenders recently and will vie (as part of consortiums) for around 45 percent of the government’s annual ICT contracts worth S$2.6 billion. The Enterprise Fixed business may surprise on the upside on bigger-than-expected contract wins and/or more earnings-accretive acquisitions,” CGS-CIMB said.
It cut its forecast for Starhub’s dividend per share to S$0.10 per annum from S$0.16, but noted that was still a “decent” 6.1 percent yield.
To be sure, CGS-CIMB warned that the stock’s re-rating “may take some time,” as it could react to TPG’s service launch by year-end, with the new entrant expected to use aggressive promotions to build up scale, potentially keeping sentiment on Starhub’s shares weak.
“If the financial impact from TPG is milder-than-feared and StarHub is able to deliver material cost savings by mid-2019, its share price may react positively,” it said.
The stock is down 0.60 percent at S$1.65 at 10:47 A.M. SGT on Thursday.