SINGAPORE (Apr 10): UOB Kay Hian is maintaining its “sell” call on StarHub with a target price of $2.25.
In a Tuesday report, analyst Jonathan Koh says, “We maintain our defensive stance on the telco sector as we brace ourselves for the impending entry of TPG as the 4th mobile operator.”
The group’s shares may experience some volatility ahead of the commercial launch by TPG due to their reliance on the Singapore market, as its local mobile business accounts for a significant 52.6% of its service revenue in 4Q17.
To recap, TPG on Mar 19 rolled out its first service targeting at seniors aged 65 and above, offering them several free benefits, such as a SIM card, 3GB of monthly data and unlimited local calls for the first 24 months.
TPG is scheduled to deliver its 4G mobile network in Singapore in the second half of 2018.
In addition, the group has adopted SFRS (I) 15 effective Jan this year, which increases equipment revenue but reduces subscription revenue.
The SFRS (I) 15 is a new financial reporting standard on accounting for revenue from contracts with customers, affecting the manner in which revenue is recognised for services provided together with equipment, such as handsets and routers, and bundling of multiple services.
The revenue recognition is then based on the value received by customers at each point in time when obligation is performed, based on a standalone selling price (SSP), which could be determined based on adjusted market prices, cost plus margin, and residual approaches.
According to the analyst, the SFRS (I) 15 would increase handset revenue, as SSP for handsets is based on market prices observed in the retail market, compared to a subsidised price previously.
“StarHub would record a small profit at the onset of the usual 24-month post-paid mobile contracts,” says Koh.
However, the implementation of the SFRS (I) 15 also means that the transaction price allocated to subscription revenue becomes smaller, as a larger amount is allocated to the sale of handset.
Thus, post-paid mobile average revenue per user (ARPU) would be lower based on IFRS (I) 15, while pre-paid mobile ARPU would remain largely unchanged.
For residential broadband services, a larger portion of the transaction price will be allocated for sale of routers and a smaller portion allocated to subscription revenue. Thus, broadband ARPU would also decline.
Meanwhile, the full retrospective approach is applied for active contracts in 2017 and the profit and loss statement for 2017 would be restated, while the opening retained earnings for 2018 would be adjusted higher to reflect revenue from sale of handsets that was supposed to be recognised in prior years.
The potential cash tax payable estimated at $50 million, including timing for payment, is still being discussed with IRAS.
The analyst believes that there is no impact on cash flow expect for the one-time tax payable on adjustment to opening retained earnings.
On the other hand, StarHub has made good progress in its fixed enterprise business, by acquiring Accel Systems & Technologies to improve capabilities in cyber security and system integration.
As at 10.32am, shares in StarHub are trading 2 cents lower at $2.26 or 49.2 times FY18 book with a dividend yield of 7.0%.
