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

STARHUB LTD (SGX:CC3)

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.

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.

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).

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.

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.

We keep StarHub’s earnings, Target Price and Add rating unchanged, as we see only marginal earnings accretion from the deal.
See StarHub (SGX:CC3); StarHub Share Price; StarHub Target Price; StarHub Analyst Reports; StarHub Dividend History; StarHub Announcements; StarHub Latest News.
Cost cuts in line with or above guidance may raise investor confidence in its earnings delivery, leading to a re-rating.
Its FY20F EV/OpFCF of 10.7x is at a 17% discount to the ASEAN telco average. See attached PDF report for peer comparison table for ASEAN telcos.
Downside risk: stiffer-than-expected competition.

FOONG Choong Chen CGS-CIMB Research | Sherman LAM Hsien Jin CGS-CIMB Research | https://www.cgs-cimb.com 2020-03-12

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