StarHub - Maybank Kim Eng 2018-09-05: Temasek Team Up

StarHub - Maybank Kim Eng Research 2018-09-05: Temasek Team Up STARHUB LTD SGX:CC3

StarHub - Temasek Team Up

Cyber security JV. Maintain BUY.

  • StarHub is forming a new JV company (Ensign) with an unlisted wholly owned subsidiary of Temasek (Leone) to grow its cyber security business locally and regionally. We await the finalization of the deal by Oct 2018 and revised contributions from the cyber security business to assess final impact to our forecasts.
  • StarHub remains our only BUY in the Singapore telco space with a DCF based (WACC 5.7%, LTG -1%) Target Price of SGD1.96.
  • Worse than expected wireless and enterprise competition are the key risks to our outlook.

Deal mechanics: 60% stake initially; 40% in future.

~ ~ Where SG investors share
  • StarHub will use internal cash to pay SGD36m for its initial 60% stake in Ensign. Temasek’s indirect wholly owned subsidiary Leone will be the partner. The two parties will inject their respective existing cyber security businesses into Ensign.
  • In year 3 to 5, either party has the option to trigger StarHub’s sale of a 20% stake to Leone at a valuation determined by an independent party. If not triggered before year 5, Leone will increase its stake to 60% after year 5.

Not a stretch and a positive contributor in year 1

  • The SGD36m injection will not stress StarHub’s financial covenants significantly; our current FY19E net debt to EBITDA will rise to 2.0x from 1.9x. Ensign targets initial annual revenue of SGD100m.
  • Pro-forma profitability of SGD2.7m will be suppressed by management fees but this will cease after the new entity is formed.

Awaiting completion but momentum is positive

  • We maintain our current forecasts pending deal finalization and the initial impact of the JV. We currently assume that enterprise/fixed network revenue momentum will improve to 15% in FY19E from 10% (SGD481m) in FY18E. Every 1% improvement in such revenues from FY19E would increase our Target Price by 1%.
  • We believe a completed deal will enhance StarHub’s outlook and will diversify its business risk exposure.

Other management call highlights:

  • The bulk of Leone’s business is generated by Singapore government related contracts; existing relationships should be transferred to the new entity.
  • No other assets from either party will be injected in the future. It will grow organically once launched.
  • Ensign will compete for business with existing local and regional players but will particularly focus on deep expertise services and contracts rather than a subscription based model.
  • Upon completion there will be 500 staff based in Singapore. The talent pool will be expanded as the business scales up.
  • No FY19E dividend payout guidance was given. Management acknowledged FY18E remains intact at SGD0.16 and that FY19E has prospective frequency fee payments along with this transaction.

Swing Factors 


  • Potential source of new revenues from enterprise segment targeting, including government contracts revolving around the Smart Nation initiatives. 
  • A strong contribution from leasing fees from the MyRepublic MVNO deal. 
  • A muted entry by TPG is a potential upside to valuation and market sentiment. 


  • Re-contracting/retention costs rising on the back of new smartphone launches and defensive preparation against TPG’s entry. 
  • Further wireless tariff package pressure on rates and/or data allocations possible due to new competition or from incumbents. 
  • Material investments in enterprise or content space that may have a lengthy gestation period before realizing returns. 

Luis Hilado Maybank Kim Eng Research | 2018-09-05
SGX Stock Analyst Report BUY Maintain BUY 1.960 Same 1.960