• 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.

• StarHub held its Investors’ Day 2020 on 18 November 2020.
• Discussions centred on pay TV, digitilisation, Ensign, 5G and cost-optimisation.
• Medium-term challenges are known and being addressed by the company: declines in use and pricing of traditional telco products (IDD, voice, SMS), new value-added services from 5G, new sources of revenue that complement telecommunications, finding a sustainable model for pay TV and leveraging digital solutions to cut costs and improve customer experiences.
• No change in our NEUTRAL recommendation and TP of S$1.24, based on 6x EV/EBITDA, the average of regional peers.

Ensign: high-growth sector that complements telecommunications

Pure-play, end-to-end cybersecurity service provider. Ensign’s three core cybersecurity services are consulting, system integration and managed security. Around 20% of revenue comes from its high-margin consulting business. This is where it advises clients on their cyber-readiness,  develops cybersecurity strategies and responds to their cyber incidents. Lowest-margin system integration sells tools and software to bolster clients’ cyber defences. Managed security provides threat-detection, monitoring and response services. Ensign’s share of Singapore’s security service market was 16% in an S$814mn market in 2019. Contracts are secured on a multi-year basis, providing revenue stability.

Still in investment stage. The company is still in an investment mode. It continues to expand its regional footprint and R&D to enhance technology capabilities. EBITDA margins depend on the product mix. Temasek has a call option to acquire 20% of Ensign from October 2021. The price will be the higher of its fair market value as determined by an independent valuer or a 6% compounded annual return on the consideration paid.  The 20% stake will be returned to Temasek if the option is not triggered by the fifth year, in October 2023.

5G: beyond connectivity with more value-added services

Not yet prime time in enterprise. Many uses of 5G for enterprises have been touted and discussed. So far, none has been proven. StarHub still needs to build deep vertical solutions and work with the 5G ecosystem. It appears 5G adoption by enterprises will take longer than expected.

Some customer excitement. Adoption of non-standalone 5G has been “encouraging”, says  the company, especially after the launch of iPhone 12. The number of 5G subscribers was not furnished. The three propellers of consumer adoption are speed and performance, cloud gaming and media content. Bundling content with 5G can gain traction with consumers. Even professional gamers can harness 5G delivery speeds and low latency without investing heavily in hardware. Another opportunity highlighted was 5G fixed wireless broadband.

Pay TV: rethinking its economics

OTT* can circumvent boxes and help StarHub move to variable costs. Pay TV is an almost 100% fixed-cost business. Revenue has contracted S$161mn in the past two years. To overcome the negative operating leverage of a fixed-cost model, StarHub needs content costs to become more variable. To this end, it has renegotiated content contracts and is building new OTT experiences. With StarHub TV+, customers can access a variety of OTT channels such as HBO and Netflix on a single platform. This IPTV-OTT hybrid will provide more variability in priced content. Another benefit is lower delivery costs, from a plug-and-play solution. Box installation and servicing are not required.

Digitalisation: lower costs and better customer experiences

Giga! is a pure digital mobile service plan. Giga! is StarHub’s first pure digital-only product. From KYC validation to shipment of the SIMs, it is a zero-touch customer experience. Giga! is StarHub’s answer to competition from the MVNOs that target millennials with data-rich SIM-only mobile plans.

Digitalisation can save costs and improve customer experiences. StarHub is undergoing a major digital transformation. Fewer physical touchpoints have reduced the need for retail space and yielded rental savings. Commissions paid to partners can be lowered when StarHub distributes directly to customers. Customer experience on digital is enhanced as they have the convenience of picking the time to purchase their products.

Cost-optimisation: the journey continues

75% of 3-year cost-savings plan executed. StarHub is on course to save more than S$210mn over three years. As at 2Q20, 75% had been achieved: 39% from workforce optimisation, 16% from operational efficiencies and 20% from TV operations. Yet to be executed are another 9% from operational efficiencies and 16% from TV operations. Costs saved have been lower commission costs with increased online touchpoints, fewer operating leases with a more effective retail footprint, lower staff costs from simplified and streamlined processes, right sourcing, digitalisation efficiencies, lower repair & maintenance expenses from a partnership model and lower licence fees.

• 3Q20 EBITDA was within expectations, excluding government grants. YTD20 EBITDA was 76% of our FY20e forecast.
• Mobile revenue was down a hefty 29% YoY. This was due to a 25% fall in postpaid ARPU to S$29, a record low. Prepaid subscribers shrank 33% YoY.
• Border closure and loss of roaming revenue to continue to depress earnings. We do see some bright spots. ARPUs for broadband and Pay TV climbed QoQ as promotions ended.
• Maintain NEUTRAL and TP of S$1.24. TP is set at historical 6x EV/EBITDA excluding other income. We raise FY20e EBITDA by 5% to account for another S$15mn in grants in 2H20 and stronger PayTV and broadband businesses. A significant resumption of international travel is key to its earnings recovery. There are little signs yet.

Positive

+ Better QoQ ARPUs for PayTV and broadband. ARPUs for PayTV and broadband rose 2.5% and 7.1% respectively QoQ. Reduced discounts and promotions helped. Revenue for both expanded QoQ due to their better ARPUs.

Negative

- Mobile its Achilles heel. Without roaming revenue, mobile ARPU dived to a record low. Postpaid ARPU was down 25% YoY. Prepaid subscribers shrank by 108k or 33% YoY. There was less demand with fewer tourist arrivals.

Outlook

We lower revenue by 5%. Our forecast for equipment sales was too bullish. We also incorporate revenue from its new acquisition, Strateq. Our EBITDA is raised by 5% to include government grants and an expected uptick in its broadband and PayTV businesses. Enterprise division should enjoy a gradual recovery as projects resume and economic conditions recover. Separately, the launch of non-standalone 5G has garnered a better-than-expected response. Customers are transitioning faster to 5G phones. Faster speeds, lower latency and bundled content subscription have encouraged take-up by niche customers such as gamers and other heavy-content users.

Maintain NEUTRAL and TP of S$1.24

Our valuation is based on 6x FY20e EV/EBITDA. We exclude other income in our EV/EBITDA valuation as it is non-recurring.

• 2Q20 results were below expectations. Revenue and EBITDA declined by 18% and 17% YoY respectively. EBITDA would have dropped 22% YoY, excluding the JSS grant of S$15.7mn.
• The interim dividend was cut 45% to 2.5 cents. But StarHub guided full-year FY20e dividends to be at least 5 cents.
• Mobile revenue dropped 25% YoY with ARPU declining 25% due to the loss in roaming revenue.
• Maintain NEUTRAL with a lower target price of TP S$1.24. We benchmark our valuations to 6x EV/EBITDA (excluding other income). We are lowering our FY20e EBITDA by only 3% after the inclusion of around S$30mn in grant income into our EBITDA. Our revenue estimates are reduced by 6% as we further cut our mobile ARPU and subscribers assumptions. Mobile will remain a drag even into 2H20 until the roaming revenues can recover. The dividend yield of at least 4% can provide some respite to the share price.

Positives

+ PayTV stable QoQ basis. PayTV revenue was unchanged on a QoQ basis at S$46.9mn. The contraction in subscribers is now at 2k to 3k per quarter compared to the average 20k per quarter in FY19. StarHub even managed to eke out a modest $1 QoQ rise in ARPU to S$39.

Negatives

- Mobile revenue was weak on lower ARPU and subscribers. 2Q20 mobile revenue fell 25% YoY to $143mn. Revenue was hurt by 25% YoY decline in postpaid ARPU to a record low S$30. The restriction on international travel led to a fall in roaming revenue. Prepaid subscriber declined by 18% YoY to 634k, a result the drop in tourist arrivals.

-  Interim dividend cut to 2.5 cents. StarHub announced an interim dividend of 2.5 cents. This is a 45% decline from 1H19 4.5 cents. Recall that in FY19, StarHub was paying quarterly dividends of 2.25 cents.

-  Cybersecurity and enterprise similarly weak. Cybersecurity operating losses widened to S$7m in 2Q20 (2Q19: S$1mn). 2Q20 is seasonally weaker as most government contracts are completed in March. Furthermore, the company is still investing in the business especially on regional capabilities. The enterprise business is faced with a decline in projects and delayed spending, especially in managed accounts. We were surprised by the 25% YoY fall in managed services revenue as it was supposed to be the annuity segment on the enterprise business.

Outlook

The outlook will be grim for at least the next two years. The loss in roaming and tourism-related revenue cannot be replaced until our international borders are reopened. We are lowering our FY20e EBITDA forecast by only 3% after incorporating around S$30mn of government grants. Figure 1 is management guidance compared to our forecast.

5G Update

StarHub provided an update of its 5G rollout:

1. Commercial launch of 5G in 2021. The network will seamlessly work with 3G/4G services.
2. End-2022, 50% nationwide network coverage and 2025 full nationwide coverage.
3. A joint venture will be created on a 50:50 basis between StarHub and M1. The JV will own the 3.5GHx radio equipment and lease infrastructure (e.g. fibre, sites) from the parent or other parties.
4. The JV will be equity accounted and not consolidate the debt.
5. Capital expenditure is S$200mn over 5 years (StarHub share only) and front-loaded in 2H20 and 2021.
6. JV is funded by 85% debt and 15% equity. Assuming $400mn capex plan, Starhub will need to inject $30mn equity.
7. JV will have its own independent management.
8. Some of the applications supported from 5G include mobile cloud gaming, AR/VR, IOT, AI and fixed wireless access.

Unclear at the present, how much 5G can uplift ARPU for StarHub. Faster and larger capacity connectivity will not be enticing enough. Any uplift will depend on rollout of new services that can be bundled for the consumer and enterprises, for instance, gaming apps bundled into 5G offerings.

Maintain NEUTRAL with lower TP of S$1.24 (previously S$1.45)

Our valuation is based on a 6X EV/EBITDA FY20e. We have excluded other income in our EBITDA valuation as we deem it to be one-off grants and compensation for the current environment.