StarHub - UOB Kay Hian 2018-10-19: Streamlining Cost Structure On Multiple Fronts

STARHUB LTD (SGX:CC3) | SGinvestors.io STARHUB LTD (SGX:CC3)

StarHub - Streamlining Cost Structure On Multiple Fronts

  • StarHub’s operational efficiency programme is expected to generate savings of S$210m over three years, which could be utilised to finance increased investments in ICT solutions and capabilities for serving enterprise customers.
  • Management will streamline StarHub’s organisational structure to make it leaner and more agile. It is also working on network sharing.
  • We lift our target price to S$2.30 after factoring in cost savings from the operational efficiency programme. Maintain BUY.


WHAT’S NEW


Renew efforts on network sharing.

  • StarHub (SGX:CC3) and M1 (SGX:B2F) signed a MOU to study mobile infrastructure sharing focused on radio access network (RAN) and backhaul transmission in Jan 17. However, discussions between the two companies have been interrupted by a strategic review at M1 and, subsequently, management changes at StarHub.
  • With Peter K installed as new CEO, StarHub has renewed the initiative to pursue win-win collaborations with industry peers on network sharing. Management is talking to multiple parties. We suspect that StarHub could be talking to TPG Singapore and M1 on sharing of RAN and NetLink NBN Trust (SGX:CJLU) for sharing of backhaul transmission. StarHub aims to reach a commercial agreement on network sharing by 2019.
  • Network sharing should be explored as it is inefficient for Singapore to have four duplicated 5G networks. Network quality has also become less of a differentiating factor. By collaborating, both companies benefit from the expanded coverage and capacity of a single shared infrastructure. According to Ericsson, network sharing reduces site requirements by 30-40%. For network sharing that encompasses new coverage, additional capacity and network modernisation, the savings in capex is 20-30%.

Shaping a lean and agile organisation structure.

  • StarHub conducted a strategic review to improve operational efficiency, which resulted in the decision to cut 300 full-time non- customer-facing employees. Affected employees would be notified by end-October. The exercise downsizes its workforce by 12%. 
  • Management assured investors that the one-off restructuring costs of S$25m (provisions already made) would not affect StarHub’s guidance for 2018. We estimated reduction in staff costs of 7.5% in 2019.
  • StarHub’s operating structure would be streamlined for greater agility and faster decision making. Management estimates that the operational efficiency programme, including savings from procurement, leasing costs and rationalisation of spending in networks and repairs & maintenance, would generate cost savings of S$210m over three years starting 2019.



STOCK IMPACT

  • Transformation in progress. StarHub is focused on consolidating its lead to establish itself as a clear number two in the Singapore market.
  • Other key prongs of StarHub’s strategic transformation programme includes:
    1. Accelerate investments in information and communications technology (ICT) solutions and capabilities for enterprise customers, including newly established cyber-security specialist Ensign InfoSecurity. Management targets to increase contribution from enterprise customers, encompassing fixed enterprise and enterprise mobile businesses, from the current 40% to 50% of service revenue within two years.
    2. Digitalisation initiatives to transform customer experience.
    3. Build industry-leading wireless and fibre services to deliver content and applications on any device to all consumers.


EARNINGS REVISION/RISK

  • We raise our net profit forecast for 2019 by 15.3% to factor in cost savings from the operational efficiency programme.


VALUATION/RECOMMENDATION


Re-iterate BUY.

  • Our target price of S$2.30 is based on DCF (COE: 8.25% and terminal growth: 1.0%). StarHub's share price has gained 18.8% since we upgraded our recommendation to BUY on 7 Sep 18 (see report: Telecommunication Singapore - Delay Brings Reprieve).
  • We continue to like the stock due to:
    1. improvement in execution since Peter K took over as CEO on 9 Jul 18,
    2. improvement in customer service, and
    3. probability of StarHub acquiring M1 during industry consolidation in 2-3 years has been reduced.


SHARE PRICE CATALYST

  • Dividend yields are attractive at 8.4% for 2018, 6.3% for 2019 and 5.2% for 2020.
  • Savings in opex and capex from operating efficiency programme and network sharing.





Jonathan Koh CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2018-10-19
SGX Stock Analyst Report BUY MAINTAIN BUY 2.30 UP 2.100



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