+ 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%.
– 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.