STARHUB LTD (SGX:CC3)
StarHub - Upfront Investments To Drag FY22e Earnings
- StarHub (SGX:CC3)'s 4Q21 revenue met our expectations. EBITDA beat estimates at 109% of our FY21 forecast.
- Operating expenses declined 8% y-o-y in 4Q21 led by lower content cost, dealer commissions, marketing and staff cost. FY21 FCF was a record $485mil.
- StarHub guided a steep decline in service margins from 30% in FY21 to at least 20% in FY22e. StarHub will be investing in technology OPEX, staff cost and maintenance for its transformation road map of growth (DARE+). Another trigger for higher cost is electricity expenses. CAPEX to sales will rise from 4% to 12-15% of sales.
The Positives
Transformation-led cost controls.
- StarHub's service EBITDA margin of 30% for FY21 beat our expectations of 26% and guidance of at least 26%. 4Q21 experienced a significant 8% y-o-y decline in operating expenses to S$493mil. We believe StarHub’s transformation efforts to realign pay TV programming and digitalise process es resulted in lower content cost, dealer commissions and staff cost.
Record FCF supported dividends.
- FCF generated in FY21 was a record $485mil, a $97mil y-o-y improvement. A combination of higher operating cash-flow and lower CAPEX drove the improvement in FCF.
- Final dividend declared was S$0.039, up 56% y-o-y. Full-year dividend of S$0.064 exceeds our forecast of S$0.05. Guidance was at least S$0.05 or 80% payout ratio.
The Negatives
Lack of revenue growth.
- StarHub's service revenue declined 1.4% y-o-y in 4Q21. Dragging down revenues were network solutions (-9%), mobile (-1%) and entertainment and modest growth in cybersecurity. ARPU for mobile was flat y-o-y despite 300,000 5G subscribers (or 20% of postpaid).
- The absence of roaming remains a major headwind.
Cybersecurity still in investment mode.
- FY21 revenue for cybersecurity (Ensign and D’Crypt) jumped 22% y-o-y to S$268mil. However, EBITDA declined by 7% y-o-y to S$25.5mil. Net profit almost halved to S$1.7mil. Profitability was impacted by an inventory write-off of S$4.2mil in 2H21.
Outlook
- StarHub has made tremendous headway in removing fixed cost. Over the past three years, service revenue from legacy businesses (excluding cyber-security and regional ICT) has declined by almost S$500mil, whilst EBITDA only dropped S$54mil. Aggressive cost initiatives have supported earnings. The major decline in fixed costs over the past three years are staff cost (-S$86mil), operating leases (-S$80mil) and cost of services (-S$126mil). Cost of services includes content cost and dealer commissions.
- With most of the cost restructuring almost completed, StarHub needs to invest for growth (DARE+ FY22-26 growth roadmap). The current upfront investments in technology and staff are to further digitalise its internal platforms and 5G network. After the completion of these investments, profit opportunities are S$220mil and cost savings S$280mil, as guided by management.
- Some revenue opportunities after the transformation include cloud gaming and 5G solutions for the enterprise market.
- Service revenue: Growth from the consolidation of JOS Singapore and Malaysia and MyRepublic Broadband. Weakness from network solutions, pay TV subscriptions and TV advertising.
- Service EBITDA margins: Margin is lower due to higher electricity tariffs, increased OPEX in technology, manpower, content and repairs and maintenance. Margins to recover to at least 23% in FY23.
- CAPEX: Front-loaded CAPEX investments to support IT infrastructure and growth initiatives. CAPEX is expected at 12-15% of total revenue in FY22 and FY23.
- Dividends: To distribute minimum S$0.05 per share or at least 80% of PATMI (adjusted for one-off, non-recurring items).
Maintain NEUTRAL with a higher target price of S$1.35 (previously S$1.24)
- We cut FY22e EBITDA forecast for StarHub by 22%. The NEUTRAL recommendation is maintained for StarHub with a higher target price of S$1.35 (previous S$1.24). Our valuation is raised from 6x to 8x FY22e EV/EBITDA due to appreciation in peer valuation. We raised mobile ARPU expectations by 14% for FY22e as roaming revenue begins to normalise.
- See
Paul Chew
Phillip Securities Research
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https://www.stocksbnb.com/
2022-02-14
SGX Stock
Analyst Report
1.240
SAME
1.240
