StarHub - CGS-CIMB Research 2018-10-03: The Star Is Shining Brighter


StarHub - The Star Is Shining Brighter

  • StarHub announced the details of its operational efficiency programme, which is expected to realise S$210m in savings over a three-year period.
  • We raise FY19F-20F core EPS by 8-11%.
  • Maintain ADD. DCF-based target price raised by 8% to S$2.00.

Details on operational efficiency programme unveiled

  • StarHub announced today the details of its operational efficiency programme, which includes the layoff of 300 employees (11.8% of its end-FY17 workforce). It also said that ongoing natural attrition and tighter management of contractor roles will result in additional jobs being made redundant.
  • StarHub is also targeting savings in procurement activities, leasing costs, network/systems repairs and maintenance and sales and distribution expenses.

S$210m savings targeted over FY19-21

  • The programme is expected to realise S$210m in savings over a three-year period, i.e. across FY19-21. As resources will be directed to fund growth opportunities, StarHub says lower net savings will be realised (although no further guidance was provided).
  • A one-off restructuring cost of c.S$25m will be incurred, including funding to support outplacement, training and coaching. StarHub says such cost will not impact its FY18 guidance.

~ ~ Where SG investors share

Sizeable savings & keeping to execution timelines are key positives

  • This was not entirely a surprise as StarHub's CEO, Peter K, mentioned during a luncheon in mid-Aug that he would provide more details on the company’s strategic transformation programme in 3Q18.
  • Nevertheless, this announcement is positive because:
    1. the cost savings is not only quantified but also rather sizeable, averaging S$70m p.a. and
    2. StarHub’s new CEO is tracking closely with his execution timeline as guided to investors.

FY19F-20F core EPS raised by 8-11%

  • We had previously factored in a 4.9% reduction in service opex between FY18F-21F, or a cumulative savings of S$146m over three years. We now further cut our staff cost assumptions, resulting in cumulative service opex savings of S$193m over the same period. Hence, our FY19F-20F core EPS is raised by 8-11%.
  • We keep our FY18F-20F DPS forecast of S$0.10 unchanged, supported by average FCF/share of S$0.12 (ex-spectrum payments). StarHub’s net debt/EBITDA now peaks at 2.3x in FY21F.

Maintain ADD; DCF-based target price raised 8% to S$2.00

  • We raise our DCF-based target price by 8% to S$2.00 (WACC: 7.1%), after raising our earnings forecasts. We expect StarHub’s share price to react positively to this announcement.
  • Execution on the transformation plan is now key to delivering the cost savings, as well as ensuring they are not masked by cost incurred to pursue new revenue opportunities.
  • Key risk to this announcement is that staff layoffs may attract government scrutiny, as well as, possibly dent staff morale.

FOONG Choong Chen CFA CGS-CIMB Research | 2018-10-03
SGX Stock Analyst Report ADD Maintain ADD 2.00 Up 1.850