StarHub - UOB Kay Hian 2022-01-26: On Stable Footing, Frontloading Capex To Drive Future Earnings

STARHUB LTD (SGX:CC3)

StarHub - On Stable Footing, Frontloading Capex To Drive Future Earnings

StarHub (SGX:CC3) continues to experience improvement amid rational competition and increased 5G network rollout. The launch of HubBundle (mobile, home broadband, entertainment) has been encouraging and the company aims to drive stickiness via innovative products. As such, we expect StarHub to frontload capex to drive cost and product efficiency to achieve an additional cumulative S$220m in gross profit over 2022-26 (4% incremental profit annually).

Our recent update with StarHub's management suggests continued improvements across all segments.
- On the mobile front, prepaid competition remains rational while postpaid likely benefitted from the onset of 5G network rollout. This, we believe, will help to partly address ARPU dilution from SIM-only plans as postpaid ARPUs have been stable since 1Q21. We also expect higher take-up of 5G mobile plans (5G ARPUs are estimated to be 1.2x higher than 4G ARPUs).
- In addition, StarHub’s cross-products bundling strategy is expected to help create customers’ stickiness as anecdotally, the HubBundle plan (integrated mobile, broadband, Netflix and Disney+) saw encouraging adoption since it was launched in Sep 21.

To ensure sustainability, StarHub acquired Ensign (cybersecurity), Strateq (regional ICT), JOS (ICT), and MyRepublic (enterprise broadband) over the years to help strengthen its converged business solution (5G, cloud, security). Year-to-date, the gradually improving business sentiment paved the way for Ensign to register a 14% y-o-y revenue growth while operating profit grew to S$6.8m in 9M21 vs S$0.7m in 9M20.
At this juncture, Ensign’s orderbooks remained strong (positive public sector contribution) and it is estimated that it has an 18% market share in Singapore. Ensign is poised to benefit from a five-year 36% CAGR growth for cloud security by 2024, according to Gartner. With that, StarHub will continue to look for strategic partnerships to move up its value chain for sustainable growth.

StarHub has a budget of S$270m (capex and opex) over 2022-24 for digital platforms and 5G network rollout. Including the S$26.3m (shared with M1) 2.1 GHz 5G spectrum fee, a total of about S$300m frontloaded investments are expected to materialise in the near term. Despite frontloading capex, StarHub remains committed to its 5 cent or 80% dividend payout policy, and is looking to grow in dividends with its profit growth.

In essence, StarHub targets S$280m in cost savings plus S$220m in gross profit growth cumulatively from 2022-26. The gross profit growth is expected to be driven by revenue uplift from the mobile and enterprise segments (specifically from 5G enterprise, cloud gaming, and digital solutions). This would exclude any M&A opportunities in the pipeline.
After achieving S$273m cost savings in 2019-21, StarHub is targeting another S$280m cost savings from 2022-26. The key savings identified include:
1. workforce efficiency via streamlining processes and right sourcing,
2. reduced physical stores and office space,
3. lower commission cost with increased migration to online touchpoints, and
4. continuously shifting its content cost structure from a fixed basis to a variable basis.

After the recent proposed acquisitions of MyRepublic Broadband and JOS (Singapore and Malaysia business), StarHub continues to look out for M&A opportunities to accelerate growth and create new revenue stream in the enterprise segment.
StarHub continues to seek deals within the region, targeting companies that:
- have a strong growth track record,
- are financially accretive, and
- are at reasonable valuations.
The mode of acquisition will be StarHub as the controlling stake or through an entire buyout.
…to strengthen enterprise business beyond 2022/23. We expect earnings and cost synergies from the consolidation of MyRepublic Broadband and JOS to materialise in 2023 and beyond. Specifically, we expect cost savings from rental savings with the consolidation of office/warehouse spaces and joint procurement savings.

Maintain HOLD with a DCF-based target price of S$1.30 (COE: 8.6%; terminal growth: 0%). At our fair value, StarHub will trade at 6x 2022F EV/EBITDA, 1SD below its five-year mean EV/EBITDA of 8.5x. StarHub offers a sustainable dividend yield of 4%.
See
Catalysts:
- A key re-rating for the stock includes the return of tourists to Singapore – propping up prepaid SIM card sales.
- Market consolidation – exit of mobile network virtual operators.
- Potential network carved out/shifted to an asset-light business model (sale and leaseback of network). Management is of the opinion that the cost of capital from the capital market is much more attractive vs the leasing model at this juncture.
- Faster-than-expected 5G adoption and new business cases in Singapore.

Chong Lee Len UOB Kay Hian Research | Chloe Tan Jie Ying UOB Kay Hian | https://research.uobkayhian.com/ 2022-01-26

SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.300 SAME 1.300