SINGAPORE (Sept 6): DBS and RHB are maintaining their “hold” and “neutral” calls on StarHub with the respective price targets of $1.42 and $1.78, while CGS-CIMB Research’s “add” call remains unchanged with a target price of $1.85.

While all three research houses are positive on recent news of telco’s latest joint venture (JV) with Temasek unit Leone Investments to form a cybersecurity entity, Ensign, their forward estimates remain largely unchanged as they believe it will take time for the development’s earnings impact to kick in.

In a Thursday report, DBS Group Research analyst Sachin Mittal says he continues to expect StarHub to cut its dividends in FY19F in order to match its net profit level, as the group’s equity valued will be wiped out by 2020 should it maintain similar dividend payments such as the $277 million it has committed to pay in annual dividends in FY18.

He values the stock at a 12-month forward EV/EBITDA of 5.6 times, which is at a ~20% discount to the 7 times regional average.  

Going forward, he thinks the group is likely to see an annual EBITDA contraction of 4.4% from FY17A-20F due to a contracting pay-TV business; heavy competition from M1 in the broadband segment; and a lack of support for mobile revenues from a new mobile virtual network operator (MVNO).

“While StarHub has struck an MVNO partnership with MyRepublic, which could support the telco’s contracting mobile business, we believe it could take at least 1-2 years before StarHub records any meaningful contributions from MyRepublic,” says Mittal.

“Excluding the current contribution of StarHub’s cybersecurity operations and ASTL, we estimate that Ensign would add ~S$5-10m over FY19F to StarHub’s earnings which we believe would not be material enough to compensate for the losses in the mobile and pay-TV,” he adds.

Likewise, RHB Research expects synergies from the StarHub-Temasek deal to accrue over time with a progressive ramp-up over the next 1-2 years.

Nonetheless, it estimates the merger to bring about net earnings accretion of 0.7% and 4.7% for FY18 and FY19, respectively, assuming that Ensign generates in excess of $100 million revenue per annum and a net margin of 15%.  

“StarHub trades at 6.6 times FY19F EV/EBITDA, at -1.5SD below its historical mean. We believe valuations are fair, given the competitive risks in the market – e.g. new mobile virtual network operators (MVNO) and the impending rollout by TPG Telecom – and potential downside to dividends,” notes RHB.

Like the other two research houses, CGS-CIMB Securities analyst Foong Choong Chen highlights the likelihood of mild near-term earnings accretion with a marginal impact on net debt/EBITDA, which is estimated to rise only slightly to 1.4 times from 1.3 times after factoring in the net cash outlay.

He estimates net profit accretion by Ensign to fall within the range of $2.5 million to $5.5 million, or 2-3% of current FY19F net profit.

“No change to our earnings forecast, as we see only mild earnings accretion from the deal. Still, we are positive on this move as it may put StarHub in a better position to capture opportunities in the fast-growing cyber security market in Singapore/regionally,” opines the analyst.

“A milder-than-feared impact from TPG and the delivery of material cost savings by mid-2019 would be positive for the share price, in our view. StarHub is trading in line with its 10-year EV/OpFCF mean in FY20-21F when earnings hit a trough.”

As at 2:15pm, shares in StarHub are trading 3 cents higher at $1.64 or 12.83 times FY18F book.