StarHub - UOB Kay Hian 2018-10-01: Benefitting From Change In Industry Dynamics

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STARHUB LTD SGX:CC3

StarHub (STH SP) - Benefitting From Change In Industry Dynamics

• We have seen an improvement in execution at StarHub since Peter K took over the helm as CEO with effect from 9 Jul 18. Our channel checks suggest that customer service has improved. The permutation of possible scenarios has increased because:
  1. TPG Singapore will be spun off, and
  2. Keppel and SPH could gain majority control of M1 through general offer at S$2.06.
• The valuation discount imposed on StarHub should be rightfully reduced.
• Maintain BUY and lift target price to S$2.10.

WHAT’S NEW

New CEO injects new vigour.

• StarHub’s new CEO Peter Kaliaropoulos (Peter K) has over 35 years of experience with senior leadership experience at Zain (Saudi Arabia), BT (Asia Pacific), Telstra (Australia & USA), Optus (Australia), Clear (New Zealand), Batelco (Middle East) and Ooredoo (Kuwait). Execution has improved since Peter K took over the helm as CEO with effect from 9 Jul 18.
• Within two months of his appointment, StarHub has scaled up in cyber security with the merger of Accel Systems & Technologies with Temasek’s Quann World to form Ensign InfoSecurity.

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Differentiating through better customer service.

• StarHub plans to differentiate itself by delivering high service standards to delight its customers. It has integrated customer service touch-points like retail centres and My StarHub app. StarHub seeks feedback by sending customers a simple SMS, with just four questions, to rate the service they have just received. Our channel checks suggest that customer service has improved.

StarHub benefits from change in industry dynamics.

• In the past, we saw StarHub as the acquirer driving consolidation of the industry, from four to three mobile players in 2-3 years. Our thesis has changed with two recent developments:
  1. Spin-off of TPG Singapore before TPG VHA merger. TPG Telecom intends to undertake a separation of its Singapore mobile business to its existing shareholders through an in-specie distribution before the implementation of merger between TPG and Vodafone Hutchison Australia (VHA). TPG Singapore would become a separate standalone company, presumably listed on ASX. TPG Singapore could be open to an M&A and should be seen as a takeover target.
  2. M1 could become an acquirer. Konnectivity Pte Ltd, a JV between Keppel Corporation (Keppel) and Singapore Press Holdings (SPH), has made a pre- conditional voluntary general offer for M1 at S$2.06. In the past, M1 was seen as a takeover target with a fragmented shareholding structure. If Keppel and SPH are successful in their efforts to gain majority control of M1, M1 would no longer be a takeover target. Instead, M1 could be positioned as an acquirer during the industry consolidation due to support from strong shareholders.

STOCK IMPACT

Benefitting from change in industry dynamics.

• In the past, the most likely scenario was for StarHub to acquire M1 during industry consolidation in 2-3 years. The permutation of possible scenarios has increased. We believe industry consolidation could involve:
  1. StarHub acquiring TPG Singapore,
  2. M1 acquiring TPG Singapore, or
  3. StarHub and M1 in merger of equals.
• The valuation discount imposed on StarHub should be reduced, given that either StarHub or M1 could be the acquirer during an industry consolidation in 2-3 years.
• We have lowered the beta for StarHub from 1.25x to 1.1x, which reduces our cost of equity from 9.0% to 8.25%. We lift our target price higher from S$1.92 to S$2.10 accordingly.

Presumptuous to assume takeover offer for StarHub.

• At the offer price of S$2.06, M1 is valued at EV/EBITDA of 7.2x based on its financial performance in 2018F. 
• StarHub would be valued at S$2.15 if we apply the same 2018F EV/EBITDA of 7.2x. However, investors should not be presumptuous to assume another general offer is forthcoming.

EARNINGS REVISION/RISK

• We maintain our existing earnings forecasts.

VALUATION/RECOMMENDATION

• Maintain BUY. Our target price of S$2.10 is based on DCF (COE: 8.25% and terminal growth: 1.0%).

SHARE PRICE CATALYST

• Dividend yield is attractive at 8.5% for 2018, 6.4% for 2019 and 5.3% for 2020.
• M1 and StarHub collaborating on network sharing.

Jonathan Koh CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2018-10-01

SGX Stock Analyst Report BUY Maintain BUY 2.10 Up 1.920