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Nikkei Markets

StarHub shares find favor after upside surprise from earnings

Cost cuts help but pressure on mobile, TV revenue remains

A man talks on his mobile phone as he walks past a StarHub shop in Singapore.   © Reuters

SINGAPORE (Nikkei Markets) -- Investors have warmed to StarHub following its quarterly results, which were well above expectations partly due to cost cuts. But a recovery is far from assured for Singapore's second-largest telecommunications company as it grapples with pressures from the intensely competitive mobile phone and pay TV markets.

Shares of StarHub surged 8.3% in Wednesday's trading session after it posted a 1.7% year on year increase in third-quarter net profit to 58 million Singapore dollars ($42.8 million). The profit handily beat the consensus estimate of S$40 million in a Refinitiv poll and was also an improvement on the second quarter's S$39.5 million.

At least two brokerages have since upgraded the stock, which gained another 1.4% by early afternoon Thursday.

Among the positives in the earnings report were the higher margins from equipment sales, lower staff costs as compared to a year ago as well as a one-off payment of S$9 million from rival TPG for the use of some equipment. But revenue in StarHub's core mobile and pay TV services showed yet another decline.

Like counterparts elsewhere in the world, Singapore's three major telecom companies have been hurt by lower income from mobile phone services as consumers switch from high-cost international direct dial services to cheaper data calls. Prices for various mobile plans have also fallen as incumbents try to lock in customers ahead of Australia-based TPG's entry into the Singapore market early next year.

In the case of StarHub, there is the added challenge of an erosion in pay TV revenue as consumers abandon its pricier service for online providers such as Netflix, which offer more content at a far lower cost.

Despite the rally in its share price over the past two days, StarHub, whose major shareholders include Singapore Technologies Telemedia, Qatar's Ooredoo, and Nippon Telegraph & Telephone, remains the city-state's worst-performing telecom stock this year.

StarHub shares have lost a fifth of their value to date while those of larger rival Singapore Telecommunications have gained nearly 15%.

In a bid to save costs, StarHub laid off 300 full-time employees, or more than a tenth of its staff, in October last year. CEO Peter Kaliaropoulos said during the results briefing that the company may exceed its targeted S$210 million in gross cost savings by 2021.

DBS Group Research, which lifted its rating on StarHub to buy from hold, said that while revenues continue to come under pressure, the company may benefit from a significant reduction in capital expenditure in the next two years.

Besides reducing its investments in cable TV and broadband, StarHub intends to submit a joint bid for a 5G licence in Singapore next year, potentially saving tens of millions of dollars.

"New entrant TPG is struggling to fulfil its network rollout obligations," the brokerage added, indicating that the Australian mobile operator may struggle to gain market share from existing players, including Keppel Corp's M1, the smallest of the three.

Other brokerages, include Daiwa, remain wary, noting StarHub now expects service revenue to fall by 2-3% this year, worse than the earlier forecast of zero to 2%.

While the benefits of its transformation program, which emphasizes cost cuts and newly created areas such as cybersecurity, are becoming clearer, revenue pressures continue to engulf various parts of its businesses, Daiwa analyst Ramakrishna Maruvada said in a report.

"Overall, we think that revenue trends need to stabilize before we can be more confident over the medium-term cash flow outlook," added Maruvada, who has a hold rating on StarHub.

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