StarHub - UOB Kay Hian 2020-11-19: Focusing On Good Customer Experience To Drive Near-Term Profitability

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STARHUB LTD (SGX:CC3)

StarHub - Focusing On Good Customer Experience To Drive Near-Term Profitability

• StarHub will focus on good customer experience and network quality to drive near-term profitability. This will be complemented by cost discipline and ongoing IT transformation to support high customer satisfaction over 2021-23.
• Separately, StarHub also aims to forge more partnerships to strengthen its enterprise businesses, which will be the ultimate monetisatised as Singapore transitions into a 5G era.
• Maintain BUY on StarHub with a DCF-based target price of S$1.40.

Benign competition into 1Q21 as telcos roll out 5G.

• Our channel checks suggest a fairly benign competitive landscape for the telecommunications sector for 2H20-1Q21. This, we believe, will pave the way for incumbents to sustain market share as customers shift to telcos with nationwide 5G access, better network quality and wider coverage.
• Just to recap, as of 3Q20, the Big 3 telcos (SingTel (SGX:Z74), StarHub (SGX:CC3), and M1) commanded a 93% subscriber market share in Singapore. This is a 2ppt drop from 95% a year ago with the proliferation of mobile virtual network operators’ (MVNO) SIM-only offerings. Since then, the market seems to have stabilise.
• Anecdotally, StarHub has acknowledged that its full-suite GIGA offering have helped boost subscriber growth for the group (albeit ARPU dilutive at this juncture) and exceeded management’s expectations.

StarHub to focus on excellent customer experience as a key differentiator…

• Post investor call with StarHub, we gathered that the company aims to focus on good service quality to improve customers’ experience for 2020-23. Anecdotally, since embarking on its transformation journey, its Net Promoter Score – a key measurement of customer satisfaction - has grown from 16% (end-19) to 124%. This helped lower mobile churn (from 1.6% in 3Q19 to 1.0% in 3Q20).
• In addition, StarHub’s GIGA has also garnered good traction, and customer experience has been bolstered by its fully digitalised and simplified distribution platform. Naturally, StarHub expects the enhanced customer experience to help stabilise average revenue per user (ARPU) and create customer stickiness in the longer run.

…while embarking on an IT transformation to support good customer experience.

• To recap, StarHub commenced its second IT transformation initiative in 3Q20. This will be the next phase of transformation for 2021-25, following the S$210m cost transformation programme (2019-21). The key savings identified include:
  1. workforce efficiency via streamlining processes and right sourcing;
  2. lower commission cost with increased migration to online touchpoints; and
  3. economies of scale via partnerships.
• The savings will only materialise from 2022 onwards but StarHub may look into reinvesting those savings to remain relevant and agile as operating parameters remain competitive.

Ensign: Strengthening cybersecurity businesses via strategic partnerships.

• As social distancing and working-from-home (WFH) take prominence, corporates are concerned about heightened cybersecurity risks and privacy protection issues beyond COVID-19. With that, StarHub’s cybersecurity arm Ensign has experienced an 18% y-o-y and 15% q-o-q revenue growth in 3Q20 as demand for cybersecurity services surged.
• Anecdotally, Ensign’s market share in Singapore has grown to 16% to-date since it was founded in Oct-18. We believe this is attributable to its established capabilities and talented pool via partnerships with global top-tier cybersecurity operations.
• Moving forward, StarHub aims to forge more strategic partnerships to expand market share (both locally and internationally) to achieve economies of scale.

Driving a sustainable business model

• In the near term, we expect StarHub to focus on:
  1. driving mobile revenue by leveraging its vast network coverage (with 4G and 5G network having reached 99% and 70% population respectively);
  2. Pay-TV transformation to enrich content preposition via third-party content/Over The Top (OTT) partnerships;
  3. enhancing fibre coverage to ride on the rising demand for home broadband service; and
  4. exploring 5G enterprise opportunities with a potential S$180m-190m market size identified.
• In addition, we expect StarHub to keep a tight lid on operating spending via workforce efficiency, simplified system and processes, and continue shifting its content cost structure from a fixed basis to variable basis

Digital adoption drives enterprise growth.

• Despite COVID-19 posing challenges, StarHub’s enterprise revenue grew 11% y-o-y and 14% q-o-q in 3Q20 thanks to higher demand for digitisation. As the pandemic accelerated the needs for digitalisation across businesses and drove the new norm, StarHub is capitalising on the opportunities by tapping into industries like healthcare, financial, education, government, etc that are in the midst of integrating information and communications technology (ICT) solutions to its existing portals.
• StarHub has identified SMEs as the potential mass underserved segment in Singapore (accounts for 70% of total employment) where digital adoption is the key to SMEs improving efficiency and profitability overtime during this challenging times.

5G: Progressing well,with potential monetisation over the long term.

• As of 3Q20, StarHub’s 5G Non-Standalone (NSA) network had reached 70% of population coverage - the widest in Singapore at this juncture. Thus far, the group has completed 5G base station site identification with site preparation and installation currently underway. To achieve the national aspiration of deploying 5G Standalone (SA) network, StarHub has appointed vendors, but mobile plans based on 5G SA network will only be launched towards 2Q/3Q21.
• We believe the growing demand for high speed internet on streaming, live gaming and the new norm of WFH could drive higher take-up for 5G services in the longer run.
• At this juncture, management sees encouraging early indications of the market’s appetite for 5G services as the take-up of 5G mobile plans and handsets have been encouraging. Management appears optimistically cautious on the industry’s ability to lift ARPU with better speed and quality of service with SA 5G services.

Maintain BUY on StarHub

• No change to our earning forecast for StarHub.
• Maintain BUY and DCF-based target price of S$1.40 (COE: 8.7%; terminal growth: 0%). At our fair value, StarHub will trade at 6.7x 2021F EV/EBITDA, 1SD below 5-year mean EV/EBITDA of 8.6x. The stock appears to be well-positioned to defend market share by activating customer acquisition and rolling out new products towards end-20.
• See StarHub Share Price; StarHub Target Price; StarHub Analyst Reports; StarHub Dividend History; StarHub Announcements; StarHub Latest News.
• Attractive dividend yield of 4.7% for 2021. Based on the current business recovery, StarHub has guided that 2H20 dividend could exceed the 2.5 cents declared for 1H20.

Chong Lee Len UOB Kay Hian Research | Chloe Tan Jie Ying UOB Kay Hian | https://research.uobkayhian.com/ 2020-11-19

SGX Stock Analyst Report BUY MAINTAIN BUY 1.400 SAME 1.400