StarHub - UOB Kay Hian Research 2018-09-06: Scaling Up In Cyber Security

STARHUB LTD SGX:CC3

StarHub - Scaling Up In Cyber Security

StarHub and Temasek (under its wholly-owned subsidiary Leone Investments) will inject their respective cyber security operations under Accel Systems & Technologies and Quann World to form 40:60 JV Ensign InfoSecurity.
StarHub would also be assigned economic rights to a 20% stake in Ensign for three to five years.
We view the JV as mildly positive for StarHub as it continue to engineer growth in the fixed enterprise space.
Maintain HOLD. Target: S$1.85.

StarHub and Temasek Holdings have agreed to merge their respective owned cyber security operations.

~ SGinvestors.io ~ Where SG investors share

StarHub and Leone Investments, a wholly-owned subsidiary of Temasek, have incorporated Ensign InfoSecurity.
StarHub will inject Accel Systems & Technologies and its cyber security centre of excellence for 104m Ensign shares and S$16m cash (consideration: S$120m). Accel is a cyber security systems integrator specialising in the provision of security solutions, consulting and managed security services.
Leone will inject Quann World for 140m Ensign shares (consideration: S$140m). Quann is a leading regional cyber security services provider.
StarHub will own 40% of Ensign while Leone will hold 60% after the transactions are completed in Oct 18.

Leone will assign 20% economic interest and voting rights for Ensign to StarHub for S$52m. StarHub will be able to terminate the assignment in three to five years and receive the lower of:
1. fair market value as determined by Deloitte & Touche, Ernst & Young, KPMG and PwC, or
2. reference price with built-in return of 6% p.a..
Thus, StarHub has an economic interest of 60% in Ensign until the assignment is terminated.

Ensign will be a pure play cyber security player with end- to-end capabilities. It has unique telco-centric and network-based security monitoring capabilities critical to providing enhanced security for enterprises and critical infrastructure. It has a talent pool of 500 analysts, consultants and researchers.
Ensign will support government and enterprise customers and generate revenues in excess of S$100m annually in cyber security solutions, systems integration and managed services. Management expects Ensign to generate a low double-digit EBITDA margin.

StarHub disclosed that Accel made net profit of S$3m in 1H18 (held back by management charges). Management did not disclose Quann’s financial performance but shared that Quann is profitable.

We view the merger as a mild positive for StarHub as it continue to engineer growth in the fixed enterprise space. The cyber security market in Singapore is estimated at S$700m and is projected to grow to S$1b by 2020, representing a CAGR of 15%.

We have raised our 2019 earnings by 0.6% due to contributions from Quann and cost synergies from combining Accel and Quan.

Maintain HOLD. Our target price of S$1.85 is based on DCF (COE: 9.25% and terminal growth: 1.0%).

StarHub’s dividend yield is attractive at 9.9% for 2018 but could drop to 7.5% in 2019 and 6.2% in 2020.
Secular downtrend for pay-TV business.
Risk from entry of TPG Telecom as the fourth mobile operator.

Jonathan Koh CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2018-09-06

SGX Stock Analyst Report HOLD Maintain HOLD 1.85 Up 1.820