StarHub - UOB Kay Hian 2022-12-09: On Firm Footing; Frontloading Capex To Drive Future Earnings

StarHub - On Firm Footing; Frontloading Capex To Drive Future Earnings

  • StarHub is expected to deliver S$500m in cost savings over 2022-26 under its DARE+ initiative. This entails spending S$310m to drive incremental net profit stack of S$80m from 2026 onwards – suggesting a robust 3-year earnings CAGR of 15% over 2023 26.
  • Given the hefty correction in StarHub's share price year-to-date, we upgrade StarHub from HOLD to BUY with a target price of S$1.30.
  • StarHub's share price currently trades at -2 standard deviation below its mean EV/EBITDA of 7x. Market consolidation is a key re-rating catalyst.

Starhub on track to deliver S$500m in cost savings over next three years...with investments peaking in 2023.

  • In a recent investor briefing, StarHub (SGX:CC3) gave an update on its DARE+ transformation programme. In essence, StarHub is on track to deliver S$500m in cost savings and profit opportunities over 2022-26. Management guided that it has achieved S$21m of cost savings for 2022 (a slow start), below its targeted S$35m due to delays to IT and Network Transformation undertakings.
  • Total investment over 2022-26 (for network and digitalisation) has increased from an original S$270m to S$310m but StarHub is confident it will have adequate cashflow and gearing headroom in the foreseeable future. With the bulk of investments to be spent in 2023, we expect StarHub to reap revenue growth opportunities from 2024 onwards.
  • S$80m incremental profit stack by 2026. By 2026 (3-year earnings horizon), StarHub expects S$80m incremental profit from DARE+ transformation programme. This suggest a robust 3-year earnings CAGR of 15% over 2023-26.

Market consolidation a key re-rating catalyst for StarHub.

  • We upgrade StarHub from HOLD to BUY with an unchanged DCF-based target price of S$1.30/share. We believe the risk-reward for the stock is compelling.
    • Firstly, valuation is attractive as StarHub trades at - 2 standard deviation from its mean EV/EBITDA of 7x.
    • Secondly, as StarHub embarks on its DARE+ journey, we expect earnings to gradual recover from a low base in 2022.
  • We project net profit growth of 18% y-o-y for 2023 to S$133m – still below pre-COVID-19 profit of S$178m in 2019. We also believe the market is ready for consolidation as the regulator is open to the suggestion.
  • We note that market consolidation is good for incumbents, with significant cost synergies a to consolidate among peers.

DARE+ transformation (2022-26) includes top-line growth and continuous cost discipline.

  • In essence, StarHub is targeting S$280m in cost savings plus S$220m in gross profit growth cumulatively from 2022-26. The gross profit growth is expected to be driven by revenue uplift from the mobile and enterprise segments (specifically from 5G enterprise, cloud gaming, and digital solutions). This would exclude any M&A opportunities in the pipeline.
  • After achieving S$273m in cost savings in 2019-21, StarHub is targeting another S$280m in cost savings from 2022-26. The key savings include:
    1. workforce efficiency via streamlining processes and right sourcing,
    2. reduced physical stores and office space,
    3. lower commission cost with increased migration to online touchpoints, and
    4. continuously shifting its content cost structure from a fixed basis to a variable basis.

StarHub's M&A strategy to strengthen enterprise business beyond 2023/24.

  • After the completion of MyRepublic Broadband and JOS (Singapore and Malaysia business), StarHub continues to look out for M&A opportunities to accelerate growth and create new revenue streams in the enterprise segment.
  • StarHub continues to seek deals within the region, targeting companies that:
    1. have a strong growth track record,
    2. are financially accretive, and
    3. are at reasonable valuations.
  • The mode of acquisition will be StarHub as the controlling stake or through an entire buyout.
  • We expect earnings and cost synergies from the consolidation of MyRepublic Broadband and JOS to materialise in 2023 and beyond. Specifically, we expect cost savings from rental savings with the consolidation of office/warehouse spaces and joint procurement savings.

StarHub – Earnings forecast revision & recommendation

  • No change to our earnings forecast for StarHub.
  • Upgrade StarHub to BUY with an unchanged DCF-based target price of S$1.30 (COE: 8.9%; terminal growth: 0%). At our fair value, StarHub will trade at 6x 2021F EV/EBITDA, 1 standard deviation below its 5-year mean EV/EBITDA of 8.5x.
  • StarHub offers a sustainable dividend yield of 4% for 2022-23F. See StarHub's dividend history.
  • Catalyst:
    • A key re-rating catalyst for the stock includes the return of tourists to Singapore – propping up prepaid SIM card sales.
    • Market consolidation – exit of mobile network virtual operators.
    • Faster-than-expected 5G adoption and new business cases in Singapore.

Chong Lee Len UOB Kay Hian Research | 2022-12-09

Previous report by UOB:
2022-08-05 StarHub - 2Q22 In Line; Top-line Growth From All Service Segments.

Price targets by 5 other brokers at StarHub Target Prices.
Listing of research reports at StarHub Analyst Reports.

Relevant links:
StarHub Share Price History,
StarHub Announcements,
StarHub Dividends & Corporate Actions,
StarHub News Articles

SGX Stock / REIT Search


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