+ 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.
– 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.
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.