StarHub - Phillip Securities 2020-11-20: Leaving Behind The Traditional Model

STARHUB LTD (SGX:CC3)

StarHub - Leaving Behind The Traditional Model

StarHub (SGX:CC3) held its Investors’ Day 2020 on 18 November 2020. Discussions centred on pay TV, digitalisation, Ensign, 5G and cost-optimisation.
Medium-term challenges are known and being addressed by the StarHub: declines in use and pricing of traditional telco products (IDD, voice, SMS), new value-added services from 5G, new sources of revenue that complement telecommunications, finding a sustainable model for pay TV and leveraging digital solutions to cut costs and improve customer experiences.
No change in our NEUTRAL recommendation for StarHub and target price of S$1.24, based on 6x EV/EBITDA, the average of regional peers.

Ensign’s three core cybersecurity services are consulting, system integration and managed security. Around 20% of revenue comes from its high-margin consulting business. This is where it advises clients on their cyber-readiness, develops cybersecurity strategies and responds to their cyber incidents.
Lowest-margin system integration sells tools and software to bolster clients’ cyber defences. Managed security provides threat-detection, monitoring and response services. Ensign’s share of Singapore’s security service market was 16% in an S$814mn market in 2019. Contracts are secured on a multi-year basis, providing revenue stability.

The company is still in an investment mode. It continues to expand its regional footprint and R&D to enhance technology capabilities. EBITDA margins depend on the product mix. Temasek has a call option to acquire 20% of Ensign from October 2021. The price will be the higher of its fair market value as determined by an independent valuer or a 6% compounded annual return on the consideration paid.
The 20% stake will be returned to Temasek if the option is not triggered by the fifth year, in October 2023.

Many uses of 5G for enterprises have been touted and discussed. So far, none has been proven. StarHub still needs to build deep vertical solutions and work with the 5G ecosystem. It appears 5G adoption by enterprises will take longer than expected.

Adoption of non-standalone 5G has been “encouraging”, says the company, especially after the launch of iPhone 12. The number of 5G subscribers was not furnished. The three propellers of consumer adoption are speed and performance, cloud gaming and media content.
Bundling content with 5G can gain traction with consumers. Even professional gamers can harness 5G delivery speeds and low latency without investing heavily in hardware. Another opportunity highlighted was 5G fixed wireless broadband.

Pay TV is an almost 100% fixed-cost business. Revenue has contracted S$161mn in the past two years. To overcome the negative operating leverage of a fixed-cost model, StarHub needs content costs to become more variable. To this end, it has renegotiated content contracts and is building new OTT (over-the-top) experiences.
With StarHub TV+, customers can access a variety of OTT channels such as HBO and Netflix on a single platform. This IPTV-OTT hybrid will provide more variability in priced content. Another benefit is lower delivery costs, from a plug-and-play solution. Box installation and servicing are not required.

Giga! is StarHub’s first pure digital-only product. From KYC validation to shipment of the SIMs, it is a zero-touch customer experience. Giga! is StarHub’s answer to competition from the MVNOs that target millennials with data-rich SIM-only mobile plans.

StarHub is undergoing a major digital transformation. Fewer physical touchpoints have reduced the need for retail space and yielded rental savings. Commissions paid to partners can be lowered when StarHub distributes directly to customers. Customer experience on digital is enhanced as they have the convenience of picking the time to purchase their products.

StarHub is on course to save more than S$210mn over three years. As at 2Q20, 75% had been achieved: 39% from workforce optimisation, 16% from operational efficiencies and 20% from TV operations. Yet to be executed are another 9% from operational efficiencies and 16% from TV operations.
Costs saved have been lower commission costs with increased online touchpoints, fewer operating leases with a more effective retail footprint, lower staff costs from simplified and streamlined processes, right sourcing, digitalisation efficiencies, lower repair & maintenance expenses from a partnership model and lower licence fees.
See StarHub Share Price; StarHub Target Price; StarHub Analyst Reports; StarHub Dividend History; StarHub Announcements; StarHub Latest News.

Paul Chew Phillip Securities Research | https://www.stocksbnb.com/ 2020-11-20

SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 1.240 SAME 1.240