StarHub - DBS Research 2020-04-30: 5G To Improve Medium-Term Prospects

STARHUB LTD (SGX:CC3)

StarHub - 5G To Improve Medium-Term Prospects

StarHub-M1 JV secures a Nationwide 5G licence, implying big capex savings along expected lines.
5G to add ~S$10m revenue in FY21F rising to over S$100m in FY25F conservatively.
BUY, Target Price raised to S$1.75.

The 5G rollout in Singapore is slated to start from 2020 onwards. Infocomm Media Development Authority (IMDA) requires that telecommunications companies (telcos) achieve ~50% coverage by end of 2022 as the key 5G spectrum 3.5GHz, will be available for use only by 2021.The 5G rollout is much more gradual compared to 4G. As an example, 4G network coverage requirement for TPG was 100% nationwide outdoor coverage in just 12 months of spectrum rights commencement.
The slower rollout can be explained by relatively higher 5G capex (2-3x higher than 5G) and mediocre revenue opportunity in the consumer space especially over the next 2-3 years.

A report by Cisco and A.T. Kearney reveals that by FY25F, telco operators in ASEAN could increase their current revenues by 9-12%, taking advantage of new business opportunities of 5G. In ASEAN, Singapore is expected to lead the way in launching 5G in 2020, followed by Malaysia and Thailand.
Initial growth is likely to come from enterprise customers with edge computing use cases leading the way.
In FY25F, Singapore’s consumer 5G mobile subscriptions are expected to account for up to ~S$340m, while enterprise users are likely to add another ~S$310m with 5G aiding the adoption of emerging technologies such as artificial intelligence (AI), augmented reality (AR) robotics and Internet of Things (IoT). We expect StarHub to grab ~20% share of 5G revenues in Singapore.

On 17 February 2020, IMDA had revealed that the regulator received three bids for two nationwide 5G. The bids were from Singtel, TPG and a joint bid by StarHub (SGX:CC3) and M1. TPG’s bid was a surprise since we did not expect TPG to bid for a nationwide 5G license given the large capital expenditure (capex) requirement.

We project 5G capex of S$1-1.5bn by each 5G winner over the next 6-7 years compared to an estimated S$600m capex incurred on the 4G rollout over the last 5 years by StarHub. Since 5G capex will be shared between M1 and StarHub and is more gradual than 4G rollout, the resulting annual capex burden should not increase too much for StarHub.
StarHub’s 9Scts dividend per share translates into S$156m in total payout. StarHub generated operating cash flow of ~S$400-500m annually over FY17-19A. The key to sustaining dividends is to keep the annual capex in the range of S$250- 300m. A standalone 5G network would have cost StarHub S$450m in annual capex each year, making dividends unsustainable. However, we expect StarHub to incur annual capex of S$250-280m as it builds a joint 5G network with M1.

In March 2020, 3GPP, the standards organisation which develops protocols for mobile communications, informed that it is delaying work on two critical updates (Release 16 and 17) due to the COVID-19.
As of March 2020, 5G network deployments are based on Release 15, a preliminary 5G standard that largely relies on older 4G networks as the backbone for non-standalone 5G services.
Release 16 is expected to enhance standalone 5G networks with faster upload and download speeds, as well as defining 5G standards for vehicle-to-everything and industrial IoT deployments.
Release 17 will add specifications for 5G wearables and even faster network performance, among other improvements.
Singapore’s 5G rollouts could be delayed beyond 2020 in our view if Release 16 is delayed.

In the immediate term, most businesses are postponing investments and tightening their belts due to the uncertainties and loss of revenue due to the COVID-19 pandemic. However, COVID-19 has increasingly exposed gaps in cybersecurity safety across many corporations around the world as millions work from home.
Organisations which previously did not have a distributed workforce learned that their tools on hand were not designed or intended to work safely offsite on a virtual private network (VPN). As such, once the initial panic recedes, enterprises are likely to invest more in digital services and cybersecurity as a part of their business continuity planning (BCP), boosting revenues of enterprise business segments of telcos.

The World Travel and Tourism Council has indicated that once the COVID-19 outbreak is over, it could take up to 10 months for the tourism industry to recover. A substantial and prolonged decline in inbound and outbound travel due to the current COVID-19 situation is likely to result in a significant drop in the usage of roaming facilities.
Roaming revenue (which makes up 12-13% of StarHub’s mobile revenue) will be the biggest casualty, followed by prepaid mobile revenue (which accounts for 18-19% of its mobile service revenue). We project roaming revenue to drop by ~50% in 2020 due to the sharp decline in the number of business and leisure tourists, and prepaid mobile revenue to fall by ~20% due to a lower number of foreign workers.
However, once new business opportunities from 5G kicks in, we expect revenue growth to pick up from FY22F onwards.

We project StarHub to maintain 9Scts DPS as the company should be able to benefit from capex savings from its successful joint-bid with M1 for a 5G licence.
StarHub’s gearing is one of the lowest in the region and the company could benefit from potential consolidation in the sector post 5G licence award.

Our DCF based valuation (WACC 7.4%, terminal growth 1%) results in a Target Price of S$1.75 for StarHub. Our Target Price translates into 6.9x 12-month forward EV/EBITDA, which is a 10% premium to regional average of 6.3x, reflecting StarHub’s fixed dividend commitment and future capex savings from a joint 5G network.
See StarHub Share Price; StarHub Target Price; StarHub Analyst Reports; StarHub Dividend History; StarHub Announcements; StarHub Latest News.

Sachin MITTAL DBS Group Research | https://www.dbsvickers.com/ 2020-04-30

SGX Stock Analyst Report BUY MAINTAIN BUY 1.750 UP 1.40