Brokers' take: OCBC, DBS downgrade StarHub to 'sell' and 'hold' respectively, RHB maintains 'neutral'

OCBC Investment Research has downgraded its rating on StarHub from "hold" to "sell", on the back of a deep dividend cut and an earnings slip.

Similarly, DBS Group Research has downgraded its rating on the telco from "buy" to "hold", while RHB Research has maintained its "neutral" call.

OCBC has now reduced its fair value estimate from S$1.92 to S$1.64, representing a 9 per cent downside from the counter's Feb 14 close of S$1.90, before the release of its results for the fourth-quarter and full-year ended Dec 31.

Likewise, DBS has revised its 12-month price target from S$2.45 to S$1.92, while RHB is slightly more optimistic, with a target price of S$2.02, up from S$1.90 previously.

As at 12.03pm on Friday, the counter was trading at S$1.68 apiece, down 11.6 per cent or 22 Singapore cents. Some 14.5 million shares changed hands, making it one of the most actively traded counters on the Singapore bourse in the morning trade.

Said OCBC: "Moving forward, we note that the group will be adopting a new variable dividend policy, with a 80 per cent payout ratio on net profit attributable to shareholders excluding one-off items."

"We note that the group intends to pay nine Singapore cents per share for FY19 as part of this transition, with any additional payment to occur in Q4 19. This comes in below ours, and the street's FY19 forecast dividend expectation."

Therefore, the brokerage has adopted a more conservative approach, with 8.3 per cent to 13.8 per cent cuts to its FY19-FY20 earnings estimates.

In addition, OCBC also highlighted that outlook for the group remains challenging, especially with TPG Telecom's commercial roll-out on the horizon. While it noted that StarHub has made headway with renegotiating some Pay-TV contracts away from a fixed-pricing model, "structural issues still remain", OCBC said.

Separately, DBS noted that StarHub's fourth-quarter underlying earnings of S$42 million, which were down 19 per cent year on year, came in 10 per cent below its estimates.

It added that staff costs savings are likely to be eroded by the expansion of Starhub's joint venture, Ensign.

"In Q3 2018, StarHub entered into a joint venture agreement with Certis Cisco, a wholly owned subsidiary of the Temasek Group, to pool the cybersecurity assets of StarHub and Certis to create Ensign, a pure-play cybersecurity service provider.

"While the combined operations were marginally profitable at the point of formation, Q4 2018 turned into a loss-making quarter for the cybersecurity company which reported losses of S$12 million. Cybersecurity operations are heavily labour intensive. The S$30 million staff-cost savings that StarHub accrued is likely to be overridden by the expansion efforts of Ensign, as StarHub scales-up cybersecurity operations," DBS said.

After factoring in these cost escalations, DBS has revised its FY19/20 net profit forecasts by 8 per cent and 11 per cent respectively. It added that StarHub's FY19 forecast dividend yield of 4.9 per cent is less appealing than its peers such as Singtel and Netlink NBN Trust.

Conversely, RHB noted that StarHub's Q4 headline earnings were marred by one-offs or provisions, including customer loyalty redemptions, and that results were largely in line with its consensus estimates. Looking ahead, RHB expects Ensign to remain as the group's key growth driver.

StarHub announced its results on Thursday, stating that it intends to pay a quarterly cash dividend of at least 2.25 Singapore cents per share for FY19, down from four cents per quarter in 2018.

The company posted a fourth-quarter net profit of S$19.8 million, down 61.8 per cent for the year-ago period.

Total revenue for the three months ended Dec 31 fell 9.8 per cent to S$620 million, as mobile revenue slipped 13.7 per cent or S$30.8 million to S$194 million.

Fourth-quarter earnings per share was one Singapore cent, while net asset value per share was 31.9 Singapore cents at the end of 2018.

A final dividend of four cents per share for the fourth quarter of 2018 will be paid in May.

Said chief executive Peter Kaliaropoulos over an earnings call on Thursday: "Monetisation remains a challenge and we need to understand the realities of a saturated market in Singapore."