Compiled by Lynette Tan
STARHUB | HOLD
TARGET PRICE: $1.55
AUGUST 7 CLOSE: $1.45
DBS Group Research, August 7
Q2 2019 earnings of $39.5 million (-37 per cent year-on-year) was in line with our expectations. Earnings were primarily driven by lower losses in the cyber security segment.
Cyber security losses narrowed to $800,000 over Q2 versus a loss of $11.4 million in Q1, with the absence of one-off costs from the formation of the Ensign joint venture and set-up costs recognised over Q1.
1H 2019 earnings accounted for about 51 per cent of our FY 2019 forecast.
StarHub is seemingly cheap after a 15 per cent year-to-date contraction, trading at a 12-month forward EV/Ebitda (enterprise value to earnings before interest, tax, depreciation and amortisation) and PE (price-to-earnings) of 6.6 times and 13.6 times respectively, near -2 standard deviation on both metrics.
However, StarHub's only growth engine, the fixed network solutions segment, is now contracting due to tight price competition.
Cyber security, which is presently loss-making and may not materially contribute to the bottom line in the near term, is the only segment that is expanding.
Besides, StarHub may not record tangible savings from its ongoing cost transformation programme either as those savings are re-invested in the business.
While StarHub offers an attractive 6 per cent FY 2019 forecast yield, the sustainability of the current yield remains questionable with ongoing pressure on the bottom line, about $282 million payment due over forecasted FY 2020 for the 700MHz spectrum and high leverage of 1.64 times net debt to trailing 12-month Ebitda.
NETLINK NBN TRUST | BUY
TARGET PRICE: $0.94
AUGUST 7 CLOSE: $0.88
Maybank Kim Eng, August 6
Q1 FY2020 revenue, Ebitda and core profit were 25 per cent to 26 per cent of our and consensus FY 2020 forecasts, with growth driven by cable to fibre migration. We maintain our forecasts and dividend discount model-based target price of 94 cents.
With a virtual residential-fibre monopoly and guaranteed regulated returns, we continue to believe NetLink provides a haven amid the current industry turbulence.
Similar to end-FY 2019 guidance, management expects revenue growth from residential connection services and installations this year. Higher but undisclosed capex is also planned. Despite a lower interest-rate environment, it does not expect a mid-term review of its regulated returns.
During a recent 5G consultation held by regulator Infocomm Media Development Authority (IMDA), management proposed a single network to be operated under a regulated asset base (RAB) framework, similar to the residential-fibre model. However, other proposals advocated a two-network, non-RAB regulated model.
IMDA will consider all the proposals before reaching a decision, likely by year-end. If NetLink were awarded, we think this project could provide upside potential.
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