StarHub - CGS-CIMB Research 2020-03-12: Raising Bets On Fixed Enterprise Via Strateq


StarHub - Raising Bets On Fixed Enterprise Via Strateq

  • StarHub will buy an 88.3% stake in Strateq (IT solutions provider) for S$82m to help it further expand into the fast-growing fixed enterprise business.
  • We expect the deal to be slightly earnings-accretive (equivalent to 1.2% of our FY20F net profit), with StarHub’s dividend-paying capacity intact.
  • Reiterate ADD, with an unchanged DCF-based target price of S$1.80.

StarHub acquires 88% stake in Malaysia-based Strateq for S$82.1m

  • StarHub (SGX:CC3) will acquire an 88.3% equity stake in Strateq Sdn Bhd, a Malaysia-based IT solutions provider, and 100% of its redeemable preference shares, for a total cash consideration of S$82.1m. The sellers are Navis (private equity firm) and several individual shareholders. The balance 11.7% stake in Strateq will be retained by its Group MD, Tan Seng Kit. StarHub expects the acquisition to be completed by 1H20.
  • Strateq, established in 1988, is the market leader in IT infrastructure deployment for the petrol retail sector in Malaysia, Singapore, Thailand and Hong Kong. It also focuses on healthcare information systems, cloud services, data analytics, data centre services and IT infrastructure projects. The majority of its customers are large corporations (including the world’s biggest oil and gas companies) and government entities. About 85% of its revenue is from Malaysia, with the balance from overseas as it has ventured out with some of its key customers in recent years.

Acquisition done at fair valuation

  • StarHub will fund the acquisition via bank loans. This should not be an issue, as we estimate StarHub’s end-FY20F net debt/EBITDA will rise just slightly, from 1.54x to 1.66x.
  • We deem the valuation of Strateq as fair, at a FY19 P/E of 20.4x (c.16% premium over Heitech Padu’s [HEIT MK] 17.6x) and P/S of 1.5x (in line with Malaysian system integrator and ICT sector average of 1.6x).

Further expansion into fixed enterprise and geographically

  • Operationally, we view the acquisition positively as it will help StarHub further expand, both into the fast-growing fixed enterprise business as well as geographically. This will help to reduce reliance on its traditional mobile, pay TV and broadband business in Singapore, which is not only hitting saturation point but also facing stiff competition.
  • We believe there are revenue synergies, as Strateq and StarHub can cross-sell each other’s products/services to their existing client base. StarHub says there could be some potential cost synergies as well, mainly from the reduction in third-party engagement for service delivery by bringing it in-house.

Slightly earnings-accretive; dividend-paying capacity intact

  • Based on Strateq’s FY19 net profit, and factoring in the interest cost on debt raised to fund the acquisition, we estimate that the acquisition would be slightly net profit accretive immediately, albeit by a small S$1.9m on a full-year basis, or equivalent to 1.2% of our FY20F net profit.
  • StarHub said Strateq is FCF-positive and is self-sustaining in terms of future cashflow. As net debt/EBITDA will only rise slightly, we do not think the acquisition of Strateq would materially impact StarHub’s dividend-paying capacity.
  • A key risk to this deal is the change in Strateq’s shareholders, which may have an impact on its relationship with key customers, especially in Malaysia.

Reiterate ADD; DCF-based Target Price unchanged at S$1.80 (WACC: 6.7%)

FOONG Choong Chen CGS-CIMB Research | Sherman LAM Hsien Jin CGS-CIMB Research | 2020-03-12
SGX Stock Analyst Report ADD MAINTAIN ADD 1.800 SAME 1.800