StarHub - CGS-CIMB Research 2021-08-06: 1H21 Cost Savings Surprised On The Upside

STARHUB LTD (SGX:CC3)

StarHub - 1H21 Cost Savings Surprised On The Upside

StarHub's 1H21 core EPS (stable y-o-y) outperformed due to low opex and depreciation.
2Q21 mobile revenue inched up as postpaid ARPU stabilised and subs grew, despite stiff competition. Fixed Enterprise revenue recovered q-o-q in 2Q21.
Reiterate ADD on StarHub with a 3% higher DCF-based target price of S$1.65.

StarHub (SGX:CC3)'s 1H21 EBITDA (ex-Job Support Scheme payout) eased 2.6% y-o-y (-2.1% h-o-h) on lower mobile revenue. Core EPS was stable y-o-y (+5.9% h-o-h), aided by lower depreciation. 1H21 EBITDA/core EPS were a beat at 56%/91% of our FY21F forecasts (Bloomberg consensus: 50%/49%), owing to lower-than-expected costs and depreciation.
StarHub's 1H21 dividend was at S$0.025 (1H20: S$0.025), as expected.

1H21 mobile revenue was in line, down 15.3% y-o-y (-4.7% h-o-h), due to lower roaming (COVID-19), IDD, excess data usage and prepaid SIM sales. Q-o-q, it inched up 0.5% in 2Q as postpaid ARPU stabilised and subs grew 1.8% (driven by SIM-only plans).
1H21 Pay TV revenue fell 3.4% y-o-y on lower subs, while fixed broadband revenue rose 12.5% y-o-y on higher ARPU (reduced discounts, absence of one-time rebate for service disruption in Apr 20).
After a lacklustre 1Q21, 1H21 Fixed Enterprise revenue growth picked up to 12.9% y-o-y (managed services: +13.2%, cybersecurity: +13.4%, Strateq’s consolidation).

1H21 service EBITDA margin was stable y-o-y (+1.2% points h-o-h) at 29.9% as StarHub delivered content and staff cost savings.
EBITDA for cybersecurity improved to S$13m in 1H21 (1H20: S$2m).
On its 3-year cost savings programme (ending in Oct 21), StarHub expects to achieve S$273m in total savings, i.e. 30% above its initial target of > S$210m. StarHub will provide more guidance on its next 5-year transformation programme in Nov 21.
Meanwhile, StarHub's FY21 capex guidance has been cut to 7-9% of sales (previous: 9- 11%), mainly due to the transition of IT-related capex to a cloud-based opex model.

We raise StarHub's FY21-23F core earnings per share (EPS) foreast by 17-35%, after baking in lower opex, depreciation and capex. We now see FY21F core EPS sliding 23.0% y-o-y due to COVID-19, mobile competition and cost normalisation before rising 1.1%/16.4% in FY22F/23F as COVID-19 subsides, aided by cybersecurity growth.
We still expect S$0.05 dividend per year in FY21-22F (as per guidance) but raise FY23F dividend forecast to S$0.056 (80% payout).

We raise StarHub’s target price after our earnings upgrade, rolling forward the DCF base year and factoring in lower capex for FY21-22F.
See
Key re-rating catalyst: above-guidance cost cuts. Its FY22F EV/OpFCF of 11.0x is 21% (-1.1 standard deviation) below its 13-year mean, with decent FY21- 23F yields of 4.0-4.5% per annual.
Downside risk: greater mobile competition.

FOONG Choong Chen CGS-CIMB Research | Sherman LAM Hsien Jin CGS-CIMB Research | https://www.cgs-cimb.com 2021-08-06

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