• 2Q21 revenue and EBITDA are in line, with 1H21 numbers at 47%/52% of our FY21e forecasts. Interim DPS of 2.5cts.
• Mobile remained its Achilles heel, with lower postpaid ARPU and prepaid subscribers.
• EBITDA recovered QoQ from cost savings in content and network solutions.
• Maintain NEUTRAL and target price of S$1.24. Valuations based on regional peers’ 6x FY21e EV/EBITDA. No change to our forecasts. There is upside to our forecast if borders re-open and roaming revenue returns. Another share price catalyst could be a re-rating of its cybersecurity division via corporate exercise or sustained profitability.

The Positives

+ Strength in broadband pricing. Revenue growth in broadband came from a 14% rise in ARPU. A removal of discounts and disruption rebates supported growth despite triggering a record loss of 6,000 subscribers in 2Q21.

+ Operational savings. Operating expenses for core services – excluding enterprise and equipment sales – were down 10% YoY to S$720mn in 1H21. The bulk was saved from lower pay-TV content costs and network solutions. Outsourcing of more IT work and additional 5G expenses raised total opex.

+ Cybersecurity marginally profitable. 1H21 cybersecurity revenue rose 13% YoY to S$115mn. PAT in 1H21 was S$0.6mn, a turnaround from S$3.1mn losses a year ago. EBITDA contributions to the group were S$10.4mn or 4%. The company is investing in headcount to expand outside the public sector and into the region.

The Negative

– Mobile revenue still soft. Mobile was its largest drag, as postpaid ARPU was down 10% YoY in 2Q21. This division continued to reel from the loss of revenue in value-added services, IDD, roaming and excess data arising from global travel restrictions. Prepaid subscribers also fell 20% YoY in 2Q21 due to declines in tourists and foreign work-pass holders.

Outlook

No change in our estimates. Border closures will likely remain an overhang for now. Pay TV – which has been renamed Entertainment to include over-the-top entertainment services – will benefit from a restructuring of content costs. Broadband is expected to be an important source of growth provided there is subscriber stability.

A major growth segment is cybersecurity. As more IT services move to the cloud and cyber threats intensify, demand will likely rise. Profitability, however, will depend on the scale and type of services. Higher-value labour-intensive consulting and managed services and proprietary software are expected to drive margins.

StarHub is bullish on the potential of 5G. It sees enterprise applications being extended to verticals in healthcare, urban solutions, retail and advanced manufacturing. Consumers also stand to benefit from a richer 5G experience in cloud gaming and entertainment. We are less sanguine. There have been few use cases in 5G that can materially lift prices, so far. It remains unclear if 5G can avoid the same price competition based on commoditised bandwidths and speeds.

StarHub maintained guidance in revenue, EBITDA and dividends. Capex guidance lowered from 9-11% to 7-9% of total revenue (Figure 1). Transitioning to a more cloud-based IT operating expense model was the reason for the lowered guidance.