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DBS ups TP on StarHub as future growth prospects are intact

Samantha Chiew
Samantha Chiew • 3 min read
DBS ups TP on StarHub as future growth prospects are intact
DBS sees three pillars of growth for StarHub.
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DBS Group Research is keeping its “buy” recommendation on StarHub with an increased target price of $1.60 from $1.44 previously.

In an Oct 27 report, analyst Sachin Mittal likes the stock for its three engines of sustainable growth.

According to Mittal, StarHub offers 10% annual earnings growth over FY2021 to FY2023 led by recovery from the pandemic in FY2022, reversing five years of decline from mobile services; sustained growth in fixed broadband business as consumers shift to higher speed plans while content costs for TV business are reigned in; and growth of cybersecurity & regional ICT services.

See: StarHub kept at 'neutral' as it removes potential disrupter at a price: PhillipCapital

The way the analyst sees it, StarHub’s fixed broadband average revenue per user (ARPU) is expected to improve as consumers switch to higher speed plans. StarHub’s current fixed broadband ARPU is only $32 while its 1Gbps plan starts at $40 per month.

“Amid work from home trend, we expect more people to switch to 1Gbps and 2Gbps plans as and when they renew their contracts to ensure that video calls can be done smoothly,” says Mittal.

Meanwhile, with StarHub’s latest acquisition of MyRepublic’s broadband business in Singapore, the analyst believes that this deal bodes well for StarHub once the acquisition is completed at the end of 2021. In addition, StarHub’s investment in MyRepublic Broadband could ring in positive surprises from cost savings.

The market may be concerned about StarHub’s declining Pay TV revenue and margins due to the proliferation of over-the-top (OTT) services, Mittal is positive on this segment as he sees a marked difference in StarHub’s approach since the beginning of 2021.

StarHub, for example, has started offering OTT channels and OTT games free to its high-end mobile and broadband subscribers for a period of up to 12 months. This has been possible due to agreements with OTT players such that StarHub will not incur much cost during this free period. Only when subscribers start paying for these OTT offerings after expiry of the free offer, Pay TV providers will share a portion of that revenue with OTT players.

With that, Pay TV profitability is likely to improve each year with the right cost structure in place. Even in the worst-case scenario of all new OTT subscribers cancelling their subscriptions after the expiry of the free offer, it should be neutral to Pay TV providers’ bottom line as content-cost is linked to the content revenue.

“We expect 8-10% of the free subscribers to start paying for the OTT service after the expiry of the free period,” says Mittal, who expects that OTT subscribers will start contributing revenue to StarHub from 2022 onwards.

Overall, the stock is trading below its five-year PE of 15.5 times currently, which Mittel expects for the stock to rerate towards its +2 standard deviation PE of 18.1 times with revival of earnings growth after five-years of decline.

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As at 3.00pm, shares in StarHub are trading at $1.24 or 5.9 times FY2021 book with a dividend yield of 5.0%.

Photo: The Edge Singapore/ Samuel Issac Chua

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