StarHub (STH SP) - UOB Kay Hian 2017-06-16: Leverage And Risks Trending Higher

STARHUB LTD CC3.SI

StarHub (STH SP) - Leverage And Risks Trending Higher

StarHub has applied concerted efforts to build up its fixed enterprise business by enhancing capabilities in cyber security through acquisitions and revamp of leadership. However, financial leverage continues to increase with the issuance of S$200m 3.95% perpetual securities.
Maintain HOLD. Target price: S$2.98. Entry price: S$2.62.

StarHub has signed an agreement to acquire 51% of Accel Systems & Technologies, a cyber security consultancy and solutions provider, for S$19.4m. The acquisition will expand StarHub’s in-house cyber security capabilities and strengthen its ability to provide end-to-end cyber security solutions (system integration).
Accel has many local and multinational clients, including government agencies. It is a subsidiary of Chennai-based Accel Frontline (Bloomberg ticker: ACFL IN) listed on Mumbai Stock Exchange.

StarHub has launched its centre of excellence (COE) in May 16 to develop the cyber security eco-system in Singapore. The COE serves as a hub to bring together the best of brains and expertise to tackle cyber threats. It has five industry partners, namely Blue Coat (filter web traffic on corporate networks), Coronet (security for cloud-based software), Cyberbit (protection for enterprises and critical infrastructure), Fortinet (network and content security) and Wedge Networks (real-time security solutions).
StarHub’s COE has set up a security operations centre with round-the-clock surveillance to detect cyber threats from wired and wireless networks. It will develop solutions to protect industrial control systems and cloud-based solutions.
The COE also aims to train 300 specialists over the next five years to overcome the shortage of cyber security talent.

StarHub has appointed Chong Yoke Sin, previously CEO of Integrated Health Information Systems, as Chief of fixed enterprise with effect from 3 Apr 17. The revamp would sharpen StarHub’s focus on the fixed enterprise business.

StarHub has issued S$200m 3.95% subordinated perpetual securities on 16 Jun 17. The distribution rate is subject to step-up by 1% p.a. starting 16 Jun 27 and will reset every 10 years. Proceeds from the issue of perpetual securities will be utilised for working capital or investments. The perpetual securities are part of StarHub’s S$2b multi-currency debt issuance programme.
StarHub had earlier raised S$300m through its medium-term note (MTN) programme in May 16. The proceeds from the MTNs were utilised for the general spectrum auction that was completed in Apr 17. StarHub forked out an aggregate of S$349.6m for 30MHz of 700MHz spectrum, 10MHz of 900MHz spectrum and 20MHz of 2500MHz spectrum.

According to The Straits Times, StarHub appears to have denied speculation and stated that “management has no intention to acquire or merge with M1”.
However, the article dated 1 Apr 17 was also clear that the ultimate decision lies with Temasek’s wholly-owned subsidiary ST Telemedia, who owns a 55.8% stake in StarHub.

The MOU between StarHub and M1 allows the two companies to commence discussion and engage the regulators. Network sharing enables StarHub to ensure it provides best-in-class mobile coverage and simultaneously minimise capex and opex.
Going forward, StarHub will compete and differentiate itself based on service quality. Management hopes to finalise the framework for network sharing, which would lead to the signing of a formal agreement. However, negotiation on network sharing is still ongoing.

StarHub’s dividend yield has improved to 5.8% after the recent steep correction of Starhub's share price.
Savings in capex from sharing of mobile infrastructure with M1.

Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-06-16

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