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

STARHUB LTD SGX:CC3

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.

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.

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.

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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.

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.

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 | https://research.itradecimb.com/ 2018-10-03

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