SINGAPORE (Sept 27): StarHub shares have gained 17% over the past four weeks, from $1.62 to $1.90.

Following morning’s announcement that Keppel and SPH have made a buyout offer for M1, StarHub shares are up 11 cents or 6.2% to close at $1.88.

Since the start of the year, StarHub’s shares have declined 33%, reflecting an extremely competitive environment for telcos in the local market.

In fact, shares of the whole telco sector have been under intense pressure ahead of the entry of Singapore’s fourth telco, TPG.

“We believe that the M1 offer could be a re-rating catalyst for the telco sector as they quickly change their business models and accelerate their digital transformation strategies,” says KGI analyst Joel Ng in a Thursday non-rated report.

Amid the competitive landscape, StarHub’s EPS declined 34.8% since 2013, representing a –10.1% CAGR during the period. Net margins also reflect the same challenging environment, losing 5.6ppts from a high of 16.0% in 2013.

While StarHub has maintained its DPS at 20 cents for seven years since 2010, it cut it by 3 cents in 2017 and consensus is expecting further declines to a low of 11.9 cents by 2020F.
 
In September, StarHub formed a JV with Temasek to set up Ensign InfoSecurity, a pure-play cybersecurity firm that will offer bespoke, end-to-end security solutions to enterprises and governments globally.

“We believe the bottom-line impact from its various business initiatives is minimal in the next 1-2 years. Instead, the entrance of TPG has been a wake-up call for the telcos to accelerate their transformation strategies,” says Ng.

With the latest jump, StarHub is now trading at 7.4x FY2018F EV/EBITDA, which is comparable to M1’s valuations based at $2.06 offer price by Keppel.

While StarHub offers a dividend yield of around 6.4% in FY2019-20F, SingTel may provide a better risk/reward at this time given that it is offering a dividend yield of 5.6% for FY2019-20F.

Overall, Ng believes that as the telcos accelerate their digital transformations and leverage on partnerships with strategic shareholders, valuations may see an upward re-rating over the next few quarters.

Risks include income contribution from new business segments not ramping up fast enough to offset declining margins in their core businesses.