StarHub | Sell (Downgrade) Target price: S$2.65 Feb 6 close: S$2.80 OCBC Investment Research, Feb 6

StarHub Ltd's (StarHub) 4Q16 revenue rose 0.2 per cent yoy to S$634.8 million but as operating expenses grew at a faster pace of 2.7 per cent to S$570.7 million, 4Q16 Ebitda and Patmi plunged 13.6 per cent and 33.2 per cent yoy to S$135.7 million and S$54.0 million as strong showing from broadband and enterprise fixed were dragged by mobile, pay TV and lower sale of equipment. Operating expenses declined 2.2 per cent to S$1433.1 million but on lower service revenue and income grant, FY16 Ebitda missed our expectations as it slipped 3.2 per cent to S$690.1 million and Patmi fell 8.3 per cent to S$341.4 million.

While Starhub maintained its FY16 dividend, it is expected to cut its FY17 dividend (first cut since FY09), as management also guided for much weaker Ebitda margin on flat revenue in FY17. Given weak earnings visibility, we cut our FY17F/18F Ebitda by 17.2 per cent /16.4 per cent and lower our terminal growth rate from 0.75 per cent to 0.50 per cent. Consequently our discounted cashflow-based fair value decreases from S$3.05 to S$2.65.