SINGAPORE (Oct 16): DBS is reiterating StarHub at “fully valued” with a target price of $2.20, on falling subscribers and expensive valuation despite a decent dividend yield.
In a Monday report, analyst Sachin Mittal says, “The number of households subscribing to all three services – pay TV, fixed broadband and mobile – has been declining which has been a critical factor in dictating the stock’s performance.”
On valuation, Starhub is expensive at a forward price-to-earnings (P/E) of 17.5 times, compared to a sector average of 15 times, as well as 9 times EV/EBITDA versus a sector average of 7.5 times, as investors tend to value the company based on divided yield.
“While StarHub will maintain an annual DPS of 16 cents in 2017 (6% yield), StarHub’s annual DPS could be cut to 14 cents in FY19Fto stay below 2.0x net debt to EBITDA,” says Mittal.
According to Mittal, the market is not paying enough attention to telco competitor Circles.Life, which has only been operating for less than 12 months and seems to be doing well, supported by its service delivery model and cheaper data pricing.
Moreover, even under the bull-case scenario of StarHub sustaining EBITDA in FY18F/19F, its earnings are set to decline sharply due to sharp rise in amortisation costs as StarHub is set to pay $350 million in total for spectrum acquired in 2017’s general spectrum auction.
Possible catalyst to the stock includes a decline in hubbing households in 2H17 and changes to StarHub’s mobile plans.
“Continued downgrade of all-three services by higher-end hubbing households and possible dilution of ARPUs, due to M1’s mySIM plans, could lead to investors readjusting their expectations,” says Mittal.
As at 3.51pm, shares in StarHub are trading 2 cents higher at $2.69 or 17.3 times FY17 earnings with a dividend yield of 6.0%.
