Starhub - DBS Research 2017-01-13: Boost from network sharing

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STARHUB LTD CC3.SI

Starhub - Boost from network sharing

• StarHub and M1 to expand spectrum sharing.
• Potential drop in capex and opex after FY18.
• Capex estimates cut by 20% from FY18 onwards.
• Upgrade to HOLD on revised TP of S$3.01.

We project new entrant TPG will gain 8.5% mobile revenue share by 2022. 

• With an annual EBITDA of A$775m and FY16 (July year-end) net debt-to-EBITDA of 1.6x, TPG has enough room to roll out a nationwide mobile network. Hence, we believe the impact on the incumbents from TPG’s entry will be acute and project TPG to secure 8.5% revenue share by 2022.
• In our bull-case and bear case scenarios for the existing telcos, we project TPG to secure 6% & 10% revenue share respectively.

Reduce StarHub’s capex by 20% from FY18 onwards due to network sharing. 

• M1 and StarHub signed a Memorandum of Understanding (MOU) for collaboration in mobile infrastructure sharing, with a focus on sharing radio access network (RAN), backhaul and access assets. 
• Given the considerable synergies, especially capital expenditure, we believe StarHub’s network capex could reduce by 20% post FY18, as network sharing takes hold.

StarHub to fare better than its local peer M1.

• StarHub has a lower reliance on mobile revenue (~51% in 3Q16 vs. 68% for M1) and a stickier, less price sensitive customer base. 
• StarHub has also introduced more fixed-mobile bundling offers to reduce the loss of revenue share to a new entrant. 
• We expect StarHub’s revenue share to drop from 30% in 2015 to 27% by 2022, leading to 25% drop in group earnings by 2022 versus 2015 

Valuation: 

• Upgrade to HOLD with a higher TP of S$3.01. 
• Our revised DCF-based (WACC 6.5%, terminal growth 0%) TP is S$3.01 as we factor in the impact of lower capex. Our bull-case and bear case TPs for StarHub are S$3.40 and S$2.84 assuming 6% and 10% revenue share for TPG by 2022 respectively.

Key Risks to Our View

• Sharper-than-expected decline in adoption grant. The adoption grant for fibre is likely to decline going forward. 
• We project StarHub’s “Other Income” to decline from S$46m in 2015 to S$41m in 2016F and S$20m in 2017F due to this. However, the drop could be sharper than expected

Sachin MITTAL DBS Vickers | http://www.dbsvickers.com/ 2017-01-13

DBS Vickers SGX Stock Analyst Report HOLD Upgrade FULLY VALUED 3.01 Up 2.650