BROKERS’ DIGEST
Upgrade on positive tailwinds
Maybank Securities analyst Hussaini Saifee has upgraded StarHub to “buy” from “hold” as he sees several positive tailwinds for the company. The analyst, who has just taken over coverage of the telco, has also lifted his target price to $1.44 from $1.10 previously.
“StarHub is at the tail-end of its Dare+ investment cycle,” he writes, noting that 2024 will be the last year of the telco’s elevated Dare+ initiative.
“From here on, we expect capex (capital expenditure) levels should drop while legacy costs are eliminated,” he adds in his April 16 report.
Moving forward, StarHub’s targeted benefits should be visible from FY2025 ending December 2025 in the form of lower capex with the analyst estimating a business as usual (BAU) capex of 4% to 7% of sales compared to its current levels of 11% to 13% of sales. StarHub’s operating expenses (opex) should also be reduced as the company progressively eliminates legacy platforms with the newer platforms and links put in place, Saifee points out.
“Dare+ investments should also allow for new enterprise revenue opportunities although we have not factored that in our numbers,” he continues.
On this, the analyst has estimated the telco’s earnings to post a 10% CAGR over FY2023 to FY2026 while its free cash flow (FCF) per share should increase to 6.4 cents in FY2023 and 13.8 cents in FY2026.
“Our projected earnings growth is in line with Asean peers with high visibility linked to the end of Dare+ investments. On P/E and EV/Ebitda valuations, Starhub is trading at –1 to –2 standard deviations (s.d.) below mean and at [a] 10%–40% discounts to [its] Asean peers,” he says.
“On the other hand, dividend yield [of 6%] is at the higher end of its Asean telecom peers with even superior FCF/earnings linked growth,” he adds.
Ready for consolidation?
Beyond that, a consolidation of the telco industry remains a potential catalyst with four operators within Singapore being “highly crowded”, in Saifee’s view. Singapore is also arguably the last market in Asia to skip consolidation, he adds.
With mobile prices down some 30% in the past five years and StarHub having the support of its balance sheet and cross-selling opportunities, the telco is “better placed” to drive consolidation, says Saifee.
“If we assume a scenario whereby Starhub acquires M1 and factor in synergies at 50% of regional telco consolidation experiences, we see 23%–43% earnings accretion for Starhub by FY2025–FY2027,” he writes.
M1, which is a part of Keppel, is “slightly ahead” of StarHub in terms of mobile subscriptions. StarHub, on the other hand, is ahead of M1 in fixed broadband subscriptions.
Although M1’s mobile revenue is not available, Saifee assumes that StarHub’s figures are ahead. This is based on the 4QFY2023 call with StarHub’s management, which revealed that it has a lead of around 500 basis points (bps) over its peer.
According to Keppel’s disclosures, M1’s operating revenues stood at $1.3 billion in FY2023, compared to StarHub’s $2.4 billion in the same year.
“Of this, 61% of the revenues were from the consumer segments (mobile, handset sales, fibre etc) almost on par with Starhub at 62%. Based on the past four-year trend, M1’s consumer revenues have declined at a CAGR of -4% (StarHub: +2%) while enterprise revenues have increased at a CAGR of 32% (StarHub: +12%). M1 attributed a part of the decline in consumer revenues to lower handset sales while enterprise growth is partly linked to mergers and acquisitions (M&A),” the analyst writes.
“M1’s ebitda margins are no more disclosed. Based on FY2020 disclosures, M1’s ebitda margins were at 25%. Starhub margins back then were 27%. Starhub margins declined to 20% in 2023, partly owing to faster growth in low-margin Enterprise business as well as Dare+ linked costs. We estimate M1’s margins could have declined as well in the past four years owing to faster growth within its low-margin enterprise services,” he adds.
That said, should a consolidation happen, the possibility of network integration complications may lead to downtime in the network, which could lead to a higher churn rate.