Download - Insights Direct Company Note StarHub Ltd

2021-10-26 18:02:44WHAT'S NEW

Fixed broadband to benefit from migration to higherspeed plans; coupled with lower content costs toimprove margins as seen by the US cable companies Cybersecurity and Regional ICT services to benefit in2022 from re-commitment of postponed projects.FY21F/22F earnings raised 3%/7%, BUY with higher TP ofS$1.60 for ~28% upside potential & ~5% yield

STOCK PRICE & CONSENSUS CALL

Strong Sell Sell Hold Buy Strong Buy Stock Price DBS Recommendation DBS TargetSource: Refinitiv

FORECASTS AND VALUATION (SGD, M)FY Dec FY2020A FY2021F FY2022F FY2023FRevenue 2,029 2,055 2,211 2,306EBITDA 538.4 488.8 511.5 525.2Pre-tax Profit 192.9 150.8 162.2 165.9Net Profit 157.8 128.8 138.1 141.1Net Pft (Pre Ex.) 158.0 128.8 138.1 141.1Net Pft Gth (Pre-ex) (%) (15.3) (18.5) 7.2 2.2EPS (SGD) 9.12 7.44 7.97 8.15EPS Pre Ex. (SGD) 9.12 7.44 7.97 8.15EPS Gth Pre Ex (%) (15.3) (18.5) 7.2 2.2Diluted EPS (SGD) 9.08 7.40 7.94 8.11Net DPS (SGD) 5.00 5.95 6.38 6.52BV Per Share (SGD) 19.55 21.04 22.64 24.27PE (x) 13.5 16.5 15.4 15.1PE Pre Ex. (x) 13.5 16.5 15.4 15.1P/Cash Flow (x) 3.7 6.6 5.2 5.2EV/EBITDA (x) 5.9 7.0 6.8 6.4Net Div Yield (%) 4.1 4.8 5.2 5.3P/Book Value (x) 6.3 5.8 5.4 5.1Net Debt/Equity (x) 1.2 1.6 1.6 1.4ROAE (%) 48.1 36.7 36.5 34.8

THREE ENGINES TO POWERGROWTHINVESTMENT THESIS

Three engines of sustainable growth. StarHub offers 10% annualearnings growth over FY21-23F led by (i) recovery from thepandemic in FY22F, reversing five years of decline from mobileservices (ii) sustained growth in fixed broadband business asconsumers shift to higher speed plans while content costs for TVbusiness are reigned in (iii) growth of cybersecurity & regional ICTservicesTrading below its 5-year historic Price to Earnings ratio (PER)of 15.5x; We expect the stock to re-rate towards its +2 SD (standarddeviation) PER of 18.1x with revival of earnings growth after 5-yearsof decline. StarHub offers FY21F/22F dividend yield of 4.9/5.4%based on an 80% payout ratio. Potential catalyst: Consolidation in the mobile sector. Anymobile sector consolidation in the next 6-12 months could be a keycatalyst, leading to our bull-case TP of S$1.70

Valuation

Maintain BUY with higher TP of S$1.60. We raise FY21F/22Fearnings by 3%/7% due to a healthy growth in fixed broadbandaverage revenue per user and lower content cost. Our DCF valuationof S$1.60 (prev S$1.44) is based on WACC of 7.3% & terminal growthrate of 0%.

DCF

FYE Dec (S$m) 17A 18A 19A 20A 21FEBIT 362.4 358.1 255.8 231.3 198.3 Add Depreciation andAmortisation 280.4 276.2 361.2 306.5 294.9

Less Tax Provision (59.8) (44.9) (40.0) (32.7) (28.0)Less Capex (293.9) (272.4) (229.5) (191.2) (326.6)Add changes in Working Capital (239.9) (121.6) (105.3) 84.9 4.6 Total FCF to the Firm 49.2 195.4 242.2 398.8 143.3 Discounted FCF 49.2 195.4 242.2 398.8 143.3 Terminal Growth (assumed) 0.0% PV of FCF 1257.4 PV of Terminal Value 2778.8 Net Cash (Debt) (1249.8) Equity Value (S$m) 2786 No of shares 1731 Value Per Share (S$) 1.61

Insights Direct Company Note

ANALYSTSachin MITTAL [email protected]

Price Mkt Cap Target Price Performance Total Return Rating

SGD 1.25 SGD 2.16 B SGD 1.6 28.000% 32.762% BUY

StarHub Ltd

Bloomberg : STH SP Equity | Reuters : STAR.SI | TR PermID : 4295888098

26-Oct-2021 (View Latest Version )DBS Group Research . Equity

https://www.dbs.com/insightsdirect/company/TR4295888098

Date Title2021-10-26 10:02:44 Three engines to power growth

WHAT'S NEW

Fixed broadband to benefit from migration to higher speed plans; coupled with lower content costs to improvemargins as seen by the US cable companies Cybersecurity and Regional ICT services to benefit in 2022 from re-commitment of postponed projects .FY21F/22F earnings raised 3%/7%, BUY with higher TP of S$1.60 for ~28% upside potential & ~5% yield

StarHub LtdWhat's new

CRITICAL EQUITY FACTORS (CF)

CF 1: Mobile services revenue

Mobile services revenue CAGR to remain flat over FY20-22F.

27 Oct 2021

Mobile services revenue in FY21F is expected to witness a 5% decline (4% previously) due to heightened competition. However, withthe upward revision in the enterprise segment, we raised StarHub’s overall FY21F revenue by 0.3%. In FY22F, we expect to see arebound in the mobile services segment with revenue growing by 5% on the back of the recovery in roaming and prepaid revenue.

CF 2: Cybersecurity profit/loss

Enterprise business growth led by Cyber Security segment turnaround and acquisitions.

24 Sep 2021

Following several quarters of losses, Cyber Security business generated an operated profit of ~S$5m in 1Q20 but dipped into a lossof S$7m in 2Q20 due to sequential drop in revenue due to COVID-19 before recording S$3m and S$6m in profits respectively during3Q20 and 4Q20. StarHub is front-loading research and development and talent acquisition costs whose benefits are expected to bereaped in FY21F. If Cyber security can generate meaningful profit (S$15-20m) from FY21F onwards, that would be deemed positive

StarHub Ltd - Mobile Services Revenue - Quarterly vs. Share Price (STAR.SI)

Mobile Services Revenue

StarHub LtdCritical Equity Factors

for the stock.

CF 3: Yield spread

StarHub is likely to trade at 3.5-4.0% premium to the Singapore 10-year bond yield.

24 Sep 2021

The average spread between the yield of StarHub and the 10-year Singapore bond has been 380bps over the last 15 years. Webelieve the stock will trade at a yield of 3.5-4.0% premium to the bond yield in FY21F with Singapore 10-year bond yield which isabove 1.4%, currently. Hence, we project the stock to trade near 4.8%-5.2% yield in FY21F based on dividend per share of 6.0Sctswhich is in line with the 80% payout guidance. We expect StarHub to incur an annual capex of S$200-220m as it builds a joint 5Gnetwork with M1.

StarHub Ltd - Cyber Security Profit/(Loss) vs. Share Price (STAR.SI)

Cyber Security Profit/(Loss)


Dividend Yield vs Singapore 10 yr bond yield spread

Dividend Yield


VALUATION

Valuation

Maintain BUY with higher TP of S$1.60. We raise FY21F/22F earnings by 3%/7% due to a healthy growth in fixed broadband averagerevenue per user and lower content cost. Our DCF valuation of S$1.60 (prev S$1.44) is based on WACC of 7.3% & terminal growth rate of 0%.

DCF

FYE Dec (S$m) 17A 18A 19A 20A 21F 22F 23F 24F 25F 26F TerminalValue

EBIT 362.4 358.1 255.8 231.3 198.3 221.1 241.5 255.1 278.6 294.3

Add Depreciation andAmortisation 280.4 276.2 361.2 306.5 294.9 301.2 309.2 289.3 275.0 258.8

Less Tax Provision (59.8) (44.9) (40.0) (32.7) (28.0) (31.1) (34.4) (36.7) (40.7) (43.7) Less Capex (293.9) (272.4) (229.5) (191.2) (326.6) (341.2) (209.5) (217.8) (227.2) (237.3) Add changes in Working Capital (239.9) (121.6) (105.3) 84.9 4.6 22.7 14.3 12.9 14.4 15.7 Total FCF to the Firm 49.2 195.4 242.2 398.8 143.3 172.6 321.1 302.8 300.1 287.8 3949.7 Discounted FCF 49.2 195.4 242.2 398.8 143.3 160.9 279.0 245.2 226.5 202.5 2778.8 Terminal Growth (assumed) 0.0% PV of FCF 1257.4 PV of Terminal Value 2778.8 Net Cash (Debt) (1249.8) Equity Value (S$m) 2786 No of shares 1731 Value Per Share (S$) 1.61

Risk Free Rate (Rf) 1.5%Market Return (Rm) 9.5%Equity risk premium 8.0%Beta 0.95Cost of Equity (Ke) 9.1%Proportion of financing that isdebt 40.0%

Cost of debt 5.5%After-tax cost of debt (Kd) 4.6% WACC 7.3%

Where we differ

Our FY21F/22F earnings are ~4% below consensus each. Despite an upward revision, our FY21F/22F earnings are still ~4% belowconsensus each due to our lower service EBITDA margin assumption of 28%/27% in FY21F/22F compared to 31% in FY20.

Key Risks to Our View

Bull-case valuation of S$1.76 and bear-case valuation of S$1.20. Our bull-case scenario may materialise if there is industry consolidationover the next six months, leading to FY21-23F earnings CAGR of 12%. Our bear-case scenario may materialise if any rise in competition leads toflattish earnings over the next few years.

StarHub LtdAbout Company

PROFILE

Company Profile

StarHub Ltd is the second largest of the three telecom operators in Singapore. The company provides telecommunication services and info-communication related services. StarHub Ltd’s services include mobile services, PayTV, fixed broadband and fixed voice services popularlyknown as quadruple play services. In addition to the above services, the company develops and delivers to corporate and government clientssolutions incorporating artificial intelligence, cyber security, data analytics, Internet of Things (IoT) and robotics.

At A Glance

Issued Capital (m shrs) 1,731Major Shareholders (%) Temasek Holdings Pte Ltd 55.8Nippon Telegraph and Telephone Corp 9.9 Free Float (%) 34.33m Avg. Daily Val (US$m) 1.1GIC Industry:Communication Services / TelecommunicationServices

Business Segments

1) Mobile. This segment comprises of a wide range of mobile services allowing users to call, text, access internet, stream music and watchvideos. Amidst attempting to grow other areas of business, mobile continues to remain the largest contributor to the overall top line. Thecontribution from mobile segment to the top line in FY2020 stood at 29%.

2) PayTV. PayTV includes a gamut of international and local TV channels, an OTT app StarHub Go and StarHub Go Streaming Box which enablesusers to view the latest dramas, sports and education videos. The FY2019 was a transition year for StarHub where it migrated its userbase fromcable to fibre allowing to move towards OTT offerings, such as the comprehensive Go Max package that provides an all-in-one access forcustomers to consume content wherever they want on the StarHub Go app. PayTV segment represented 9% of FY2020’s overall top line.

3) Broadband. Broadband offers superfast, reliable high-speed fibre-optic network at great value. This segment has been stable over the lastthree years displaying flat growth. Broadband accounts for 9% of the company’s top line.

4) Enterprise. The enterprise segment can be further split into four segments namely data and internet, managed services, cyber security andvoice. Under its managed services StarHub offers one-stop integrated solutions and services ranging from managed network, data centre, cloudand mobility solutions for businesses. Pertaining to cyber security, StarHub owns 60% of Ensign which is the region’s largest pure-playcybersecurity expertise and innovation. The overall contribution from Enterprise (fixed) segment to the top line represented 32% in FY2020.

5) Equipment Sales. This segment involves the sale of handsets. As of FY2020, equipment sales accounted for 22% of FY2020’s overall top line.

Balance Sheet

Balance sheet is strong enough to support dividends at 80% payout ratio. Net debt-to-EBITDA of 1.4x is quite healthy and much belowits listed peer Singtel’s 3.2x. StarHub’s reduction in capex over FY20/21F should further boost free cash flow to support expansion.

Environmental, Social, Governance

ESG responsibilities are driven by 13 sustainability goals. StarHub’s ESG responsibilities revolve around 13 sustainability goals covering areassuch as supporting local communities, e-waste programmes addressing climate change and other environmental challenges, etc. As a part ofthis, in FY18, StarHub committed S$827,000 to 16 voluntary welfare organisations and non-profit organisations to promote employability andessential life skills among underprivileged Singaporeans. By FY22, StarHub plans to increase its renewable energy capacity to 10%.

Key Assumptions

FY Dec 2019A 2020A 2021F 2022F 2023F

Mobile EBITDA Margins 44.2 37.7 37.5 37.8 38.1CATV & Broadband EBITDA Margins 17.0 16.0 17.0 18.0 19.0Fixed Network EBITDA Margins 34.0 34.0 30.0 29.0 28.0

Segmental Breakdown


FY Dec 2019A 2020A 2021F 2022F 2023F

Revenues (S$m) Mobile 766 580 553 579 600Cable TV & Broadband 424 364 358 418 420Fixed Network 575 646 711 789 867Equipment sale 566 440 440 440 440Total 2,331 2,029 2,062 2,225 2,328

EBITDA (S$m) Mobile 338 219 208 219 229Cable TV & Broadband 72.2 58.2 60.9 75.3 79.9Fixed Network 196 219 213 229 243Equipment sale 11.0 41.4 12.0 0.0 0.0Total 617 538 494 523 551

EBITDA Margins (%) Mobile 44.2 37.7 37.5 37.8 38.1Cable TV & Broadband 17.0 16.0 17.0 18.0 19.0Fixed Network 34.0 34.0 30.0 29.0 28.0Equipment sale 1.9 9.4 2.7 0.0 0.0Total 26.5 26.5 23.9 23.5 23.7


StarHub LtdCompany Ratios

FORECASTS AND VALUATION (SGD, M)FY Dec FY2019A FY2020A FY2021F FY2022F FY2023FRevenue 2,331 2,029 2,055 2,211 2,306EBITDA 616.5 538.4 488.8 511.5 525.2Pre-tax Profit 218.6 192.9 150.8 162.2 165.9Net Profit 186.4 157.8 128.8 138.1 141.1Net Pft (Pre Ex.) 186.4 158.0 128.8 138.1 141.1Net Pft Gth (Pre-ex) (%) (34.9) (15.3) (18.5) 7.2 2.2EPS (SGD) 10.77 9.12 7.44 7.97 8.15EPS Pre Ex. (SGD) 10.77 9.12 7.44 7.97 8.15EPS Gth Pre Ex (%) (34.9) (15.3) (18.5) 7.2 2.2Diluted EPS (SGD) 10.74 9.08 7.40 7.94 8.11Net DPS (SGD) 10.75 5.00 5.95 6.38 6.52BV Per Share (SGD) 18.39 19.55 21.04 22.64 24.27PE (x) 11.4 13.5 16.5 15.4 15.1PE Pre Ex. (x) 11.4 13.5 16.5 15.4 15.1P/Cash Flow (x) 4.7 3.7 6.6 5.2 5.2EV/EBITDA (x) 5.4 5.9 7.0 6.8 6.4Net Div Yield (%) 8.7 4.1 4.8 5.2 5.3P/Book Value (x) 6.7 6.3 5.8 5.4 5.1Net Debt/Equity (x) 1.6 1.2 1.6 1.6 1.4ROAE (%) 59.5 48.1 36.7 36.5 34.8

StarHub LtdFinancial Statement

INCOME STATEMENT (SGD, M)FY Dec FY2019A FY2020A FY2021F FY2022F FY2023FRevenue 2,331 2,029 2,055 2,211 2,306Cost of Goods Sold (2,086) (1,839) (1,874) (2,002) (2,091)Gross Profit 244.8 189.9 181.3 209.8 215.7Other Opng (Exp)/Inc 11.00 41.40 12.00 0.000 0.000Operating Profit 255.8 231.3 193.3 209.8 215.7Other Non Opg (Exp)/Inc 0.000 0.000 0.000 0.000 0.000Associates & JV Inc (0.500) 0.600 0.600 0.600 0.600Net Interest (Exp)/Inc (36.70) (38.90) (43.10) (48.21) (50.41)Exceptional Gain/(Loss) 0.000 (0.100) 0.000 0.000 0.000Pre-tax Profit 218.6 192.9 150.8 162.2 165.9Tax (40.00) (32.70) (27.06) (29.09) (29.76)Minority Interest 7.80 (2.10) 5.00 5.00 5.00Preference Dividend 0.000 0.000 0.000 0.000 0.000Net Profit 186.4 157.8 128.8 138.1 141.1Net Profit before Except. 186.4 158.0 128.8 138.1 141.1EBITDA 616.5 538.4 488.8 511.5 525.2GrowthRevenue Gth (%) (1.3) (12.9) 1.3 7.6 4.3EBITDA Gth (%) (2.7) (12.7) (9.2) 4.6 2.7Opg Profit Gth (%) (28.6) (9.6) (16.4) 8.5 2.8Net Profit Gth (Pre-ex) (%) (34.9) (15.3) (18.5) 7.2 2.2Margins & RatioGross Margins (%) 10.5 9.4 8.8 9.5 9.4Opg Profit Margin (%) 11.0 11.4 9.4 9.5 9.4Net Profit Margin (%) 8.0 7.8 6.3 6.2 6.1ROAE (%) 59.5 48.1 36.7 36.5 34.8ROA (%) 6.9 5.6 4.3 4.4 4.4ROCE (%) 11.1 9.3 7.1 7.2 7.2Div Payout Ratio (%) 99.8 54.9 80.0 80.0 80.0Net Interest Cover (x) 7.0 5.9 4.5 4.4 4.3


BALANCE SHEET (SGD, M)FY Dec FY2019A FY2020A FY2021F FY2022F FY2023FNet Fixed Assets 820.2 755.0 702.6 664.8 633.8Invts in Associates & JVs 22.10 22.80 128.4 129.0 129.6Other LT Assets 949.8 993.9 1,148 1,225 1,155Cash & ST Invts 117.6 415.4 317.6 425.7 530.0Inventory 98.30 79.90 80.94 87.09 90.83Debtors 248.7 192.8 195.3 210.2 219.2Other Current Assets 477.2 471.5 471.5 471.5 471.5Total Assets 2,734 2,931 3,045 3,213 3,229

ST Debt 407.6 8.70 8.70 8.70 8.70

Creditor 539.5 555.1 562.3 605.1 631.0Other Current Liab 229.2 209.0 153.5 155.5 156.2LT Debt 640.8 1,164 1,337 1,472 1,474Other LT Liabilities 336.7 368.3 336.2 302.3 266.5Shareholder’s Equity 518.1 538.3 564.1 591.7 619.9Minority Interests 62.00 88.20 83.20 78.20 73.20Total Cap. & Liab. 2,734 2,931 3,045 3,213 3,229

Non-Cash Wkg. Capital 55.50 (19.90) 31.96 8.19 (5.68)Net Cash/(Debt) (930.8) (757.0) (1,028) (1,055) (952.6)Debtors Turn (avg days) 41.6 39.7 34.5 33.5 34.0Creditors Turn (avg days) 120.0 130.4 129.2 125.3 126.6Inventory Turn (avg days) 18.4 21.2 18.6 18.0 18.2Asset Turnover (x) 0.9 0.7 0.7 0.7 0.7Current Ratio (x) 0.8 1.5 1.5 1.6 1.6Quick Ratio (x) 0.3 0.8 0.7 0.8 0.9Net Debt/Equity (x) 1.6 1.2 1.6 1.6 1.4Net Debt/Equity ex MI (x) 1.8 1.4 1.8 1.8 1.5Capex to Debt (%) 21.9 16.3 24.2 23.0 14.0


CASH FLOW STATEMENT (SGD, M)FY Dec FY2019A FY2020A FY2021F FY2022F FY2023FPre-Tax Profit 218.6 192.8 150.8 162.2 165.9Dep. & Amort. 361.2 306.5 294.9 301.1 308.9Tax Paid (71.90) (59.10) (82.60) (27.06) (29.09)Assoc. & JV Inc/(loss) 0.500 (0.600) (0.600) (0.600) (0.600)Chg in Wkg.Cap. (105.3) 84.90 3.68 21.73 13.20Other Operating CF 45.10 54.45 (42.12) (43.89) (45.76)Net Operating CF 448.2 578.9 324.1 413.5 412.5Capital Exp.(net) (229.5) (191.2) (326.0) (340.0) (207.6)Other Invts.(net) 0.000 0.000 (70.80) 0.000 0.000Invts in Assoc. & JV 0.000 0.000 (105.0) 0.000 0.000Div from Assoc & JV 0.000 0.000 0.000 0.000 0.000Other Investing CF 6.60 (65.50) 0.000 0.000 0.000Net Investing CF (222.9) (256.7) (501.8) (340.0) (207.6)Div Paid (186.1) (82.20) (103.0) (110.5) (112.9)Chg in Gross Debt 19.90 106.7 172.9 135.1 2.24Capital Issues 0.000 0.000 0.000 0.000 0.000Other Financing CF (107.5) (48.90) 10.00 10.00 10.00Net Financing CF (273.7) (24.40) 79.85 34.65 (100.7)Currency Adjustments 0.000 0.000 0.000 0.000 0.000Chg in Cash (48.40) 297.8 (97.82) 108.1 104.3Opg CFPS (SGD) 31.99 28.53 18.51 22.63 23.06Free CFPS (SGD) 12.64 22.39 (0.108) 4.24 11.84


RECOMMENDATION DEFINITION

DBS Group Research recommendations are based on an Absolute Total Return* Rating system, defined as follows:STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)BUY (>15% total return over the next 12 months for small caps, >10% for large caps)HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)FULLY VALUED (negative total return, i.e., > -10% over the next 12 months)SELL (negative total return of > -20% over the next 3 months, with identifiable share price catalysts within this time frame)

*Share price appreciation + dividends

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StarHub LtdDisclaimer

months and does not engage in market-making.

This report is prepared by DBS Bank Ltd . This report is solely intended for the clients of DBS Bank, DBS Vickers Securities(Singapore) Pte Ltd, its respective connected and associated corporations and affiliates only and no part of this document may be(i)copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS BankLtd.

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a. An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) thetrustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary ordiscretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of theanalyst.

b. Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities inrespect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listingapplicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments inany collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme hasinvestments in securities in respect of an issuer or a new listing applicant.


# Date ofReport

ClosingPrice

12-mTargetPrice

Rating

1 30 Apr'20 1.49 1.75 BUY2 08 May'20 1.43 1.75 BUY3 22 Jun'20 1.31 1.37 HOLD4 11 Aug'20 1.22 1.16 Hold5 09 Nov'20 1.24 1.16 Hold

6 22 Feb'21 1.26 1.12 FullyValued

7 09 Jun'21 1.23 1.38 Buy

Target Price & Ratings History

Analysts: Sachin MITTAL

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