STARHUB LTD
SGX:CC3
StarHub - Massive Cost-cutting To Stabilise Earnings
- We model S$175m in savings over next three years, lifting FY19F/20F/21F earnings by 20%/35%/55%.
- Earnings to stabilise despite weak mobile and Pay TV.
- Earnings may resume growth from 2021F onwards.
- Upgrade to BUY with revised Target Price of S$2.45.
Upgrade to BUY on cost-saving initiatives.
- StarHub has disclosed a target of S$210m in cost savings over a three-year period from 2019. Staff reduction and cost reductions via procurement, leasing, repairs and maintenance and sales and distribution will be the key drivers. We conservatively model S$175m in savings after factoring in costs related to growth initiatives, with savings of S$40m/S$55m/S$80m in FY19F/20F/21F.
- StarHub’s earnings may stabilise now and resume growth from 2021F onwards as we see sector consolidation in 2-3 years due to a weak business case for TPG.
Where we differ:
~ SGinvestors.io ~ Where SG investors share
- We expect a sharp cut in dividends in FY19F to a more sustainable level.
- StarHub has committed to pay out S$277m in annual dividends in FY18. However, we project 80% payout ratio from FY19F onwards versus 100% assumption earlier as StarHub should, ideally, retain some earnings to invest in new business opportunities.
Potential catalyst:
- Commercial success of MyRepublic and/or news on TPG’s launch. Execution effectiveness of MyRepublic’s partnership with StarHub and further delay in TPG’s commercial launch, from late 2018 to early 2019, could benefit the stock.
Valuation:
- Upgrade to BUY with a higher Target Price of S$2.45.
- We deploy DFC (WACC 7%, terminal growth 0.5%) to drive our Target Price and project FY19F dividend yield of 5.8%. StarHub is likely to see a stable EBITDA over FY17A-20F (versus -4% earlier) due to the cost savings.
Key Risks to Our View:
- Bear-case valuation is S$1.75 if TPG causes severe disruption. StarHub could see a 3% drop in FY19F EBITDA under this scenario vs our base case of 1% growth.
- TPG delaying the launch by 12 months or more may lead to bull-case valuation of S$2.70. StarHub could see a 5% rise in FY19F EBITDA under this scenario vs our base case of 1% growth.
WHAT’S NEW - Big area of cost savings
Staff reduction may lead to an estimated S$30-35m in annual savings and almost S$100m in total savings over the next three years.
- Total staff expenses stood at S$282m in 2017. Workforce reductions will primarily affect backroom functions, with approximately 300 full-time employees out of an estimated 2,500.
- We estimate almost S$30-35m in annual savings from staff reduction. There will be one-off cost of S$25m in FY18.
We model operating lease cost to drop by an estimated S$20-25m annually from 2021 onwards.
- Total operating lease cost, including rental of various buildings, stood at S$129m in 2017. The major item here could be cost savings from renewal of lease for the horizontal network.
Sales & distribution cost savings could be ~S$20-30m annually in our estimates.
- Total sales & distribution cost stood at S$122m in 2017. We think with the use of digital chat as a customer care tool, there could be 30-40% savings in the customer care costs.
- Investing in digital distribution channels such as online shops and effective offline-to-online model, coupled with the use of data analytics, could lead to a 10- 15% reduction in distribution costs in our estimate.
Sachin MITTAL
DBS Group Research
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https://www.dbsvickers.com/
2018-10-04
SGX Stock
Analyst Report
2.45
Up
1.420
