StarHub's frontloading of migration costs could help rebound in 2020: analyst

The telco could see $30m savings annually as it cuts its cable services.

StarHub’s frontloading of migration costs may result in a bigger rebound in FY202020F following its announcement to pull the plug on its cable services by June 2019, according to a report by DBS Equity Research. 

“We expect StarHub’s earnings to rebound approximately 10% in FY2020 supported by cost savings, after four consecutive years of decline,” DBS analyst Sachin Mittal said. StarHub’s Q3 profits fell 12.8% to $57m from $65.4m in 2017 on the back of higher operating costs in equipment and traffic expenses from roaming. However, its revenue rose 3% to $582m from $565.2m

Also read: Starhub's Q3 profits fell 12.8% to $57m

According to RHB Research, StarHub’s call to cut cable services may be the transformation it needs to keep its Pay-TV segment going. Given the structural decay in the industry’s Pay-TV revenues, management believes the current business model where content is fixed would have to evolve to a variable model for the longer-term viability of the business,” it said.

Following this transition, analysts expect to see a sharp rise in StarHub’s cost of services in FY2019F as migrations to the National Broadband Network (NBN) accelerate.

Based on Q3 2018 results, StarHub has approximately 70,000 (15% of the total broadband subscriber base) broadband subscribers on the Hybrid Fibre Coaxial (HFC) network and Mittal estimates that around 80,000-90,000 Pay-TV subscribers are currently on HFC due to the convenience of multiple cable TV socket points.

“Assuming StarHub pays $13.50 per month for each fibre line for 80,000-90,000 subscribers, StarHub is likely to incur approximately $13-15m in annual fibre leasing costs over FY2019,” the analyst said. “Marketing expenses are also likely to edge up as StarHub advertises aggressively to lure subscribers to migrate.”

As a result, DBS factored in an approximate $16m net increase in operating expenditure (opex) after accounting for potential savings on repairs and maintenance of the HFC network of H2 2019. Consequently, it also cut its earnings forecast for FY2019F 6% or $13m.

Meanwhile, Mittal noted how earlier than expected lease savings could further strengthen StarHub’s rebound in FY2020F following its decision to decommission its HFC network after June 2019.

“StarHub would benefit from savings of around $25m in lease expenses the HFC network in FY2020F, ahead of our previous expectation of FY2021F, followed by approximately $30m savings each year,” Mittal said. “We have raised our FY2020F earnings by $12m after conservatively factoring in around $15m in savings on operating lease expenses.”

On the other hand, OCBC analyst Joseph Ng remains cautious of StarHub’s move citing that it may not be as smooth or profitable as the telco expects. “Whilst we concur with management that a variable cost model would be more sustainable, it remains to be seen if content providers will be amenable to such a change, given that some of them currently enjoy minimum guarantees and prices from StarHub,” he added.

Mittal also noted that the telco could see its staff cost savings materialise from Q4 onwards following StarHub’s $210m transformation program which included axing 300 full time employees in October. Official confirmation of delay in TPG’s commercial launch to Q2 2019, more clarity on network sharing and quarterly updates on the transformation programme could rekindle more interest in StarHub,” he said.