StarHub is facing a perfect storm: What's next for the troubled telco?

StarHub Ltd (SGX: CC3) has not been having an easy time.

Since TPG Telecom won the license for the fourth telco back in December 2016, pressure has been building for the incumbents.

Mobile virtual network operators (MVNO) such as Circles.Life have sprung up and adopted aggressive pricing plans to capture more market share.

Meanwhile, StarHub is also facing competition at its cable TV service from global players such as Netflix (NASDAQ: NFLX).

To top it off, Covid-19 has dealt another blow to the telco due to lower inbound and outbound travel and the closure of its stores.

As a whole, it seems like StarHub is facing a perfect storm.

Investors may wonder - what's next for the telco?

Is there any light at the end of this long, dark tunnel?

Weak financial and operating performance

StarHub reported a weak set of earnings for its first quarter of the fiscal year 2020.

Total revenue declined by 15.2 per cent year on year, operating profit fell 17.8 per cent year on year and net profit after tax plunged by 25.7 per cent year on year.

Service revenue was impacted by Covid-19 as border controls and movement restrictions have significantly reduced revenue from IDD, roaming and prepaid calls.

Pay TV division witnessed a steep 33.8 per cent year on year decline in revenue. Subscriber numbers continued to fall, declining by 17 per cent year on year to 327,000 subscribers.

Operational metrics also displayed broad-based weakness.

The average revenue per user (ARPU) for StarHub's mobile division continued to decline for both postpaid and prepaid customers.

ARPU for Cable TV fell steeply from $48 per month a year ago to $38, while its Broadband division's ARPU decreased from $31 to $27.

Guidance withdrawn

Measures have been put in place to mitigate the impact from COVID-19, but StarHub still expects the crisis to have a material impact on the group’s revenue and profits for 2020.

[[nid:486633]]

All but five of its retail stores have been closed, and 90% of employees are working from home.

Due to a lack of clarity on the effects of these challenges on the business, StarHub has withdrawn all guidance for the year and will provide another update to shareholders once greater visibility emerges.

To be sure, the group did generate strong free cash flow of S$119 million for the quarter.

StarHub now declares dividends on a semi-annual basis, and will provide more guidance on its dividend once more clarity emerges.

For context, StarHub used to pay an annual dividend of S$0.09 or S$0.0225 per quarter.

Measures have been put in place to mitigate the impact from COVID-19, but StarHub still expects the crisis to have a material impact on the group’s revenue and profits for 2020.

Provisional 5G licence

At end-April, StarHub announced that it was awarded a provisional 5G licence by IMDA to build and operate a 5G standalone network infrastructure.

The group will be working with M1 on this ambitious project.

5G technology will enable customers to enjoy faster network speeds and new digital services such as augmented reality for entertainment, education and healthcare.

StarHub has yet to announce its capital expenditure commitment for this long-term project, but it should be sizeable given the scope and scale needed to upgrade 4G to 5G.

This initiative implies that the group may need to spend significantly more than what it used to, further crimping its operating and free cash flows over the next few years.

Get Smart: Tough to shake off challenges

StarHub is being bombarded on multiple fronts - weaker ARPU arising from competition from MVNO and video on demand providers, the Covid-19 pandemic, higher subscriber attrition rates and required spending on 5G.

[[nid:483035]]

These problems have manifested themselves over time and are not easy to tackle from where they are today.

Some, like the pandemic, are temporary; while others, such as stiff competition, are deemed to be structural.

It will be tough for the telco to shake these challenges off as it may require a radical rethink of its business strategy.

Not only will this take time, but it may also not be feasible for the telco to adopt a different strategy when its core business is under significant stress.

Along with compulsory 5G spending, investors should be prepared for the possibility of a long winter with no dividends due to its weak financial performance.

For the latest updates on the coronavirus, visit here.

This article was first published in The Smart Investor.