• 4Q23 results were within expectations. FY23 revenue and EBITDA were 99%/101% of our FY23 estimates. The full-year dividend was 6.7 cents, a 34% YoY rise and ahead of our 5 cents estimate.
• Revenue guidance for FY24e was for weaker growth of 1-3% (FY23: +5.5%). We believe mobile revenue faces stiffer competition from lower-end price plans, thus impeding ARPU growth despite contributions from higher-margin roaming revenue.
• The increase in FY24e dividend guidance from 5 cents to at least 6 cents has placed a minimum yield of at least 5% at the current price. Our target price is raised from S$1.21 to S$1.29 as we roll over our earnings to FY24e. We peg valuation to 6.5x FY24e EV/EBITDA, in line with other mobile peers. It will be another year of investment and slow growth for StarHub with its DARE+ initiative. The expected spend is S$80mn in FY24e, of which S$32mn is opex and S$48mn capex. Any premium valuations (or re-rating) for StarHub will depend on the efficiency and revenue gains from DARE+. This is elusive so far. Another catalyst will be monetisation or operating leverage at Ensign, the cybersecurity operations.

The Positives

+ Jump in dividends supported by FCF. The final dividend was 4.2 cents, up 68% YoY. Full-year dividend payout was 80%. It aligns with management guidance to distribute at least 80% of earnings or 5 cents, whichever is higher. The company mentioned it generated a free cash flow (FCF) of S$186mn, sufficient to cover the S$115mn in dividends. However, we believe lease payments of S$37mn should be deducted from FCF as it is operating in nature.

The Negative

- Slower services revenue. Service revenue declined 1.4% YoY in 4Q23 to S$527mn, the first decline in two years. Most segments were weak. Despite roaming revenue, mobile ARPU only rose 3% YoY to S$33. Entertainment revenue declined due to the absence of World Cup 4Q22. ARPU for broadband was flat YoY at S$34 as competition is accelerating ahead of the entry of Simba, the fourth mobile operator.

• 3Q23 results were within expectations. 9M23 revenue and EBITDA were 74%/73% of our FY23e estimates. No change in StarHub FY23 guidance.
• Revenue growth of 5% YoY in 3Q23 was led by cybersecurity and mobile. Cybersecurity revenue rose 45% YoY to S$115mn on strong order books and pipeline. Mobile revenue expanded 7% YoY to S$153mn from higher roaming revenues.
• We maintain our FY23e forecast and ACCUMULATE recommendation. Our target price of S$1.21, pegged at 6.5x FY23e EV/EBITDA, is unchanged. With the S$310mn Dare+ investments in operating expense and capital expenditure, we expect an improvement in earnings in FY24e. The revenue opportunities post Dare+ investments remain unclear. The cybersecurity operation continues to build up its franchise and is yet to be fully priced into StarHub valuations as it remains unprofitable.

The Positive

+ Jump in cybersecurity. Cybersecurity registered a record revenue of S$115mn in 3Q23. Project details were not disclosed but the orderbooks and project pipelines remain healthy. There have been new solutions in AI and automation.  

The Negative

- Competition pressing down ARPUs. Competition is pressing down ARPU in mobile and broadband. ARPU was flat QoQ in 3Q23. Mobile is facing price competition from MVNOs, whilst broadband operators are pricing down ahead of the Simba.

Outlook

With Dare+ investments near completion this year, we expect an improvement in earnings for FY24e. The trajectory of earnings post Dare+ investment hinges on the new revenue opportunities resulting from the revamp of the IT systems. A wider suite of services with better customisation features are some of the benefits. Capex spending will be replaced with opex, such as the greater use of cloud solutions. Opex should also reduce in FY24 as overlapping legacy systems and costs are decommissioned.

• 2Q23 revenue was below expectation but EBITDA exceeded. 1H23 revenue and EBITDA were 44%/58% of our FY23e estimates. Equipment sales was down 21% YoY in 2Q23, but margins were strong due to lower and delayed investments in the DARE+ transformation strategy.
• FY23e EBITDA guidance was raised by between 6 and 10%. We expect the planned S$310mn in Dare+ expenditure over the next 3 years to be cut by around S$25mn. Negotiations and rationalisation have helped lower expected spend.
• We lower FY23e revenue by 7% on account of weaker mobile equipment sales and project delays in cybersecurity. Conversely, EBITDA is raised by 6% from rationalisation and delay in Dare+ spending. We raise our recommendation from NEUTRAL to ACCUMULATE. Our target price is increased from S$1.08 to S$1.21, pegged at 6.5x FY23e EV/EBITDA, in line with other mobile peers.

The Positives

+ Strong growth in mobile revenue. 2Q23 mobile revenue rose 12% YoY to S$150mn from an increase in both ARPU and subscribers. The strength in ARPU is from higher roaming revenue, recontracting to higher priced plans and an increase in value added services (such as cyber protect plus).

+ Strength in entertainment revenue. Entertainment (or payTV) grew revenues on the back of higher ARPU from English Premier League (EPL). EPL has also helped in driving up advertising and commercial revenue.

The Negative

- Weakness and restructuring in enterprise revenue. Enterprise revenue (network, cybersecurity, regional ICT) was flat YoY in 2Q23. The bulk of the decline was from regional ICT business, lower hardware sales and discontinuation of legacy business in JOS Singapore.

• Revenue and EBITDA were in line with expectations at 22%/25% of our FY22e estimates. 1Q23 revenue growth of almost 9% YoY was broad-based, especially mobile roaming revenue and higher ARPUs in entertainment.
• The extra investment into the DARE+ transformation was around S$25mn of the expected S$155mn to be spent this year. The bulk of this spend will be in opex. We estimate S$90mn.
• FY23e will be a transition year as StarHub undergoes huge expenditure namely in IT. In general, these investments will lower operating cost as networks and infrastructure are replaced and move to the cloud. Revenue opportunities are expected to come from the launch of a All-in-One app platform, more self-serve consumer features, faster speed and agility to launch products and providing Greentech and hybrid multi cloud capabilities to the enterprise segment. We maintain our FY23e forecast and NEUTRAL recommendation. The target price of S$1.08 is unchanged, pegged at 6.5x FY22e EV/EBITDA, in line with other mobile peers.

The Positive

+ Roaming revenue lifted mobile. Mobile revenue rose 13.4% YoY to S$152mn, supported by both ARPU and subscriber growth. Roaming is the largest driver of ARPU recovery despite ongoing migration to SIM only. Prepaid remains challenged with sluggish net adds and lower prices.

The Negative

- Weakness in broadband. Excluding the MyRepublic acquisition, broadband revenue declined an estimated 5% YoY to S$49mn. Broadband is facing higher price contribution. ARPU and subscribers were basically flat QoQ. The acquisition of MyRepublic has only lifted StarHub broadband ARPU by S$1 to S$34. The launch of SIMBA (formerly TPG) broadband plans will further pressure prices.

• Revenue and EBITDA were in line with expectations at 101%/102% of our FY22e estimates. 4Q22 revenue growth of 23% was supported by mobile and broadband acquisition. EBITDA halved due to DARE+ transformation and one-off expenses. FY22 dividends are down 22% YoY to 5 cents.
• Guidance is for another weak year of EBITDA margins for FY23. Service EBITDA margins to be maintained at 20% with revenue growth of 8-10%.
• Around 35% or S$75mn of the planned S$310mn DARE+ has been spent. From the remaining S$235mn to be spent, we expect S$180mn to be used in FY23e. Bulk of the DARE+ transformation cost is in EPL content and IT software and services. We maintain FY23e revenue but lowered EBITDA by 4%. Our target price lowered to S$1.08 (prev. S$1.15), pegged at 6.5x FY22e EV/EBITDA, in line with other mobile peers. We downgrade our recommendation to NEUTRAL. We do not find the dividend yield attractive as investors weather another year of weak earnings.

Source: Company, PSR

The Positive

+ Strength in mobile revenue. 4Q22 mobile revenue growth accelerated 13% YoY. Growth rates not seen since FY05. Revenue growth was driven by both ARPU and subscriber growth. Re-opening of borders continues to bolster roaming revenue and lift ARPU. Postpaid net adds were 19k (3Q22: +26k) and market share has widened by 0.9% points over the past 12 months to 23.4%.

The Negatives

- 4Q22 operating expenses outpacing revenue. Operating expenses jumped 35% YoY to S$667mn. Excluding the S$30.8mn non-current, the rise will still be high at 29% YoY. Types of cost that outpaced revenue were repairs and maintenance, marketing and Pay TV content cost.

- Drop in dividends. FY22 dividend was down 22% to 5 cents. FY23e dividends guidance is unchanged, a payout of at least 5 cents. With CAPEX to sales ratio expected to double from 7.3% in FY22 to between 13-15% in FY23e, there is little upside in dividends.

• Under StarHub’s DARE+ transformation (2022-26) to reduce cost and create new revenue streams, S$310mn of investments are required from FY22-24e. Around S$75mn has been spent with the bulk (est. S$150mn) to be spent in FY23e.
• EBITDA is expected to return to the FY21 baseline of S$500mn by FY24 (FY22e: S$415mn).
• The 3-5 month delay in project implementation and higher cost in cloud infrastructure will elevate the operating cost and Capex in FY23e. We have not modelled the higher cost pending FY23e guidance, but there is upside risk. Our FY22e and FY23e forecasts are unchanged, but the target price is maintained at S$1.15, pegged at 7x FY22e EV/EBITDA, in line with other mobile peers. We maintain an ACCUMULATE recommendation.

Key Highlights

Higher cost expected in FY23e. The investments in StarHub’s DARE+ transformation (2022-26) is raised by S$40mn to S$310mn due to increased investments in cloud infinity. Around 24% or S$75mn (Figure 1) has been spent in FY22e including EPL costs, 5G and start-up costs of new businesses. Another S$150mn is expected to be spent in FY23e. The doubling of investments over FY22e is due to the 3-5 month delay in implementation plus an increase in budgeted investments.

Figure 1: Huge opex coming in FY23e

Source: PSR

Bulk of the cost savings in IT. Based on the DARE+ transformation roadmap, cost saving and profit growth of S$105mn will materialise in FY24.  Around 90% are cost savings. We expect the bulk of the cost savings from FY24 to come from lower maintenance cost and software license fees of legacy systems. Another area of cost saving will be the reduced footprint of physical stores as the business model turns more digital.

Revenue opportunities are less visible. We were less clear on the revenue opportunities post the DARE+ transformation. In consumer mobile, new verticals are being introduced including Gamehub (allowing consumers to play games with expensive hardware with the use of cloud), Protecthub+ (device security and hardware replacement) and Lifehub (mobile health services partnering Alexandra Hospital). The priorities for Ensign are to expand regionally and proprietary solutions (e.g. AI cyber detection).

• 1Q22 revenue and EBITDA met our expectations at 23/27% of our FY22e estimates. We expect EBITDA margins to contract further in the remaining three quarters of the financial year due to upfront investments in IT and staff costs. EBITDA declined 11% YoY to S$109mn.
• Mobile revenue growth was softer than expected despite higher postpaid ARPU and subscribers. Weakness was from a deterioration in prepaid revenue of more than 20% YoY.
• We maintain our FY22e forecast. The return of high margin roaming revenue is a major earnings tailwind for the next several quarters as borders reopen. However, with upfront investments (IT and content) as part of the DARE+ transformation roadmap, EBITDA margins are expected to deteriorate over the next three quarters. We upgrade our recommendation to ACCUMULATE from NEUTRAL due to the recent share price weakness. Our target price of S$1.35 is maintained. Valuations are 8x FY22e EV/EBITDA, in-line with other mobile peers.

Results at a glance

Source: Company, PSR #Note – Only selected financials are provided in the 1Q22 update.

The Positives

+ Broadband revenue at 5-year high. Broadband revenue has been progressively growing through higher prices, lower discounted contracts and upsizing to higher speed 2Gbps plans. Broadband has become an essential service amid the Covid-19 pandemic.

The Negatives

- Costs piling up. Service EBITDA margin was down almost 7% points to 24.2%. It remains above FY22e guidance by at least 20%. We expect higher costs in the coming three quarters. EBITDA margin recovery is only expected in FY23e. Higher cost was incurred on staff, electricity and IT.

Outlook

Roaming will provide an upside surprise in revenue. However, earnings will be bogged by higher cybersecurity staff costs and upfront investments in technology. The purchase of EPL exclusively for six years (pricing details not available) will be an added fixed cost burden. Nevertheless, StarHub said it has strategic initiatives for EPL together with other OTT content. EPL could be the beachhead to enhance its OTT offerings in gaming, entertainment and sports, all bundled into a “super app”.

Upgrade to ACCUMULATE from NEUTRAL with an unchanged TP of S$1.35

Our valuation is based on regional peers’ 8x FY22e EV/EBITDA.

• 4Q21 revenue met our expectations. EBITDA beat estimates at 109% of our FY21 forecast.
• Operating expenses declined 8% YoY in 4Q21 led by lower content cost, dealer commissions, marketing and staff cost. FY21 FCF was a record $485mn.
• 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.
• We cut FY22e EBITDA by 22%. The NEUTRAL recommendation is maintained 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.

The Positives

+ Transformation-led cost controls. Service EBITDA margin of 30% for FY21 beat our expectations of 26% and guidance of at least 26%. 4Q21 experienced a significant 8% YoY decline in operating expenses to S$493mn. We believe StarHub’s transformation efforts to realign pay TV programming and digitalise processes resulted in lower content cost, dealer commissions and staff cost.

+ Record FCF supported dividends. FCF generated in FY21 was a record $485mn, a $97mn YoY improvement. A combination of higher operating cash-flow and lower CAPEX drove the improvement in FCF. Final dividend declared was 3.9 cents, up 56% YoY. Full-year dividend of 6.4 cents exceeds our forecast of 5 cents. Guidance was at least 5 cents or 80% payout ratio.

The Negatives

- Lack of revenue growth. Service revenue declined 1.4% YoY in 4Q21. Dragging down revenues were network solutions (-9%), mobile (-1%) and entertainment and modest growth in cybersecurity. ARPU for mobile was flat YoY 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% YoY to S$268mn. However, EBITDA declined by 7% YoY to S$25.5mn. Net profit almost halved to S$1.7mn. Profitability was impacted by an inventory write-off of S$4.2mn 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$500mn, whilst EBITDA only dropped S$54mn. Aggressive cost initiatives have supported earnings. The major decline in fixed costs over the past three years are staff cost (-S$86mn), operating leases (-S$80mn) and cost of services (-S$126mn). 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$220mn and cost savings S$280mn, as guided by management. Some revenue opportunities after the transformation include cloud gaming and 5G solutions for the enterprise market.

• 3Q21 results met our expectations. 9M21 revenue and EBITDA were at 72% and 80% of our FY21e forecasts respectively.
• Broadband and entertainment revenue trending ahead of our estimates due to increase in ARPUs. Mobile remains weak, dragged down by large churn in prepaid subscribers.
• 3Q21 cybersecurity operating profits more than doubled from S$2.8mn to S$5.8mn.
• No change to our forecasts. We maintain NEUTRAL with an unchanged target price of S$1.24. Valuations based on regional peers’ 6x FY21e EV/EBITDA. Starhub pays a stable 4% dividend yield with undervalued optionality in roaming and cybersecurity. There is upside to our target price if borders re-open faster, allowing roaming revenue to return. Another re-rating catalyst is sustained earnings from the cybersecurity operations or a corporate exercise for higher price discovery.

The Positives

+ Surge in operating profit in cybersecurity. 3Q21 revenue jumped 73% YoY to S$79mn. Operating profits spiked from S$2.8mn to S$5.8mn. The quarterly revenue run-rate improved from around S$40mn to S$70mn. There is revenue volatility due to project timing. But underlying demand is secular due to consistent threat intrusions, cyber-attacks and outsourcing of cybersecurity needs to established organizations such as Ensign.

+ Rising ARPU in broadband. ARPU jumped 13% YoY to S$34 on the back of reduced legacy promotions and higher 2GBps data plans with OTT bundles.

The Negative

- Mobile revenue is still soft. The loss of roaming revenue has capped postpaid ARPU at S$29, almost 30% below pre-pandemic S$40 (excluding the impact of SIM-only plans). This quarter experienced a huge 50k churn out of prepaid customers to 458k subscribers.

Outlook

Border re-opening especially in Malaysia and China will be key drivers for roaming revenue to return. Dividend guidance of a minimum of 5 cents per share or at least 80% PATMI is maintained.

Maintain NEUTRAL and TP of S$1.24

Our valuation remains based on regional peers’ 6x FY21e EV/EBITDA.

• Acquiring a 50.1% stake in MyRepublic’s (MR) Singapore Broadband business for S$70.8mn. And extending a S$74.2mn 3-year loan to MR Holding company.
• The acquisition will further consolidate the broadband market into a tighter oligopoly. Synergies include network cost savings and cross-selling into MR’s higher ARPU customer base.
• We are neutral on the transaction. A large benefit is to consolidate or even remove a potential competitive threat in the marketplace. The acquisition is EPS accretive and valued at FYJun21 EV/EBITDA of 8.0x and 13.6x PE. Our NEUTRAL recommendation and estimates are unchanged pending completion of the transaction in December 2021.

Recent Events

1. StarHub will invest S$70.8mn for a 50.1% stake. A further deferred consideration of up to S$92mn when certain financial matrices are met.
2. StarHub will extend a 3-year loan (extendable another 2-years) of S$74.2mn to MyRepublic Holding Company (MR HoldCo).
3. The FY21 NAV of MyRepublic Singapore (or target company) is negative S$1.2mn, net debt of S$7.2mn, EBITDA of S$18.58mn and PATMI of S$10.4mn.

Our View

The Positives

+ Consolidating and avoiding any potential threat.  StarHub’s broadband market share will rise 6% points to 40%. A tad below leader SingTel’s 43%. The transaction will further consolidate the market into effectively two major operators with at least 80% share. Another benefit is the possible avoidance of a better funded shareholder of MR that could price disrupt the market.

+ Cost and revenue synergies. The cost synergies will come from sharing of network infrastructure cost and capital expenditure. StarHub can drive more products such as cloud computing and OTT into MR’s higher ARPU consumer customer base. MR also has SME customers where StarHub’s enterprise solution may become an attractive value add.

+ Financially accretive acquisition. The acquisition will raise StarHub historical FY20 EPS by 3.8% to almost 9 cents. EBITDA will also improve by around 3.3%.

The Negatives

- Not entirely cheap, for now. The historical EV/EBITDA and PE ratio of the acquisition are 8.0x* and 13.8x** respectively. It is above our target valuations of StarHub but considered fair once the potential synergies materialise.

- Additional risk from the transaction. The transaction includes a S$74.2mn loan to MR Holdco backed by security packages (undisclosed) and interest-bearing.

*Market cap. of S$141.3mn plus net debt of S$7.3mn and EBITDA S$18.5mn

** Market cap. of S$141.3mn and PATMI of S$10.4mn.

Maintain NEUTRAL and TP of S$1.24

Our valuation is based on regional peers’ 6x FY21e EV/EBITDA. StarHub is paying 4% dividend yields with earnings upside from roaming revenue if international borders re-open.