Local telco StarHub has announced earnings of $149.3 million in its latest FY2021 ended December 2021. This is some 5.5% lower than its earnings of $157.9 million in FY2020.

The drop in earnings was mainly due to lower wage subsidies from the government to help all Singapore-based companies tide over the pandemic. Excluding the Job Support Scheme, as the subsidy is called, StarHub would have recorded earnings growth of 17% from $126.7 million to $148.3 million.

For the full year, revenue was largely unchanged at $2.04 billion, up 0.7% from $2.03 billion recorded in FY2020. While StarHub enjoyed more revenue from its broadband and enterprise business, the topline was offset by lower revenue from mobile, entertainment and sale of equipment.

Mobile, the largest revenue segment, dropped by 8.5% y-o-y to $530.7 million, largely because of lower prepaid revenue. The decline in tourists and foreign workers population — two traditional markets for prepaid mobile — continued to weigh down this business.

The travel restrictions brought about by the pandemic hit postpaid revenue too, as the telco collected lower roaming revenue. Nevertheless, with more so-called Vaccinated Travel Lanes launched in 4QFY2021, StarHub sees a pick up in roaming contribution.

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Broadband service revenue of $194.4 million for the full FY2021 was 10.4% higher y-o-y at $194.4 million, mainly due to higher average revenue per user (ARPU) from continued reductions in subscription discounts and the absence of a one-time 20% rebate on home broadband monthly fee extended to customers for a service disruption in April 2020. Excluding the one-time rebate from the previous year, broadband service revenue for FY2021 would have been $16.8 million or 9.5% higher y-o-y.

Entertainment service revenue declined by 4.3% y-o-y to $180.0 million, mainly due to a lower subscriber base, offset by higher ARPU achieved by the higher-priced HomeHub bundled plans, lower commercial TV revenue and lower spending on advertising by enterprise customers.

Enterprise segment revenue increased by 9.4% y-o-y to $706.1 million, making this the largest business segment by revenue. The increase was mainly due to higher contributions from cybersecurity services and the first full-year consolidation of revenue from Strateq under the regional ICT Services segment. However, this was partially offset by lower revenues from data & internet, managed services and voice services.

Revenue from sales of equipment decreased 1.9% y-o-y to mainly due to $431.4 million, due to lower volume of handsets sold arising from stock constraints of certain 5G handset models. Unit selling prices of 5G handset models were, however, generally higher.

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StarHub has proposed a final dividend of 3.9 cents, higher than the 2.5 cents declared in the previous year. This brings StarHub’s FY2021 distribution to 6.4 cents. This works out to a payout ratio of 80%, which is in line with the company’s dividend policy. The company, which used to pay an annual dividend of 20 cents per share, is guiding to pay at least 5 cents per share for FY2022 and FY2023.

StarHub’s CEO Nikhil Eapen, points out that the company’s FY2021 results exceeded its guidance provided to the market over the year on all fronts, including service revenue, service ebitda margin and capex commitment levels.

In FY2021, service revenue saw a 1.4% y-o-y growth, higher than the earlier guidance that expected the line item to remain stable. Service editda margin for the year was 29.8%, higher than the updated guidance of “at least 26%” in November 2021 and the original guidance of “24% to 26%” back in February 2021. “This reflects operating efficiencies, cost discipline, as well as some delayed incurring anticipated costs for our transformation,” says Eapen.

Meanwhile, capex commitment was 3.7% of total revenue in FY2021, outperforming the updated guidance of “between 7% and 9%” in November 2021 and the original guidance of “between 9% to 11%” that was originally guided in February 2021.

“We are quite pleased with this comprehensive set of results across revenue, ebitda, net income and free cash flow as we enter into 2022 and invest significantly into DARE+,” says Eapen, referring to the company’s transformation roadmap meant to arrest the declining earnings.

In view of some of the company’s recent progression in its DARE+ growth roadmap, which includes several significant investments, the company has also provided guidance for FY2022 and an outlook for FY2023.

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StarHub expects service revenue to grow at least 10% y-o-y in FY2022 with higher revenues to be achieved across most segments, as well as maiden contributions from the acquisitions of JOS Singapore and Malaysia, as well as MyRepublic Broadband. Subsequently, FY2023 service revenue is targeted to grow by an incremental 5% to 10% y-o-y as StarHub starts realising early outcomes from its DARE+ initiatives.

StarHub’s CFO Dennis Chia expects several revenue drivers. For, one, the cybersecurity business will continue to grow, the “small recovery” in mobile roaming will pick up as well.

With the worst of the pandemic woes over, StarHub is planning to switch gear and invest for growth instead of keeping costs in check. For example, the company is spending upfront for IT transformation, talent acquisition and entertainment content. It is also paying attention to network repairs and maintenance. It expects higher operating costs no thanks to increased electricity tariffs too. As such, StarHub expects its service ebitda margin to be at least 20% in FY2022, from just below 30% generated for FY2021. This is then targeted to recover in FY2023 to at least 23%.

However, Chia points out the guidance is on the conservative side. “We have not assumed the synergies from our recent acquisitions in these numbers and we have not assumed full recovery of roaming activities coming through in these numbers. And we have also not assumed any further M&A that we may do.”

“We expect 2023 to be the crossover year, where we get our ebitda back up to 2021 levels, and then we grow from there,” adds Eapen.

Overall, analysts are keeping a rather neutral stance on StarHub following the announcement of its FY2021 results along with its guidance for FY2022. Paul Chew of PhillipCapital likes StarHub’s DARE+ transformation-led cost controls, which brought service ebitda margin to 30% for FY2021, beating his expectations of 26% and StarHub’s guidance of 26%. “We believe StarHub’s transformation efforts to realign pay-TV programming and digitalise processes resulted in lower content cost, dealer commissions and staff cost,” says Chew.

On the other hand, Chew is concerned about StarHub’s lack of revenue growth. FY2021 revenue was 0.7% higher y-o-y at $2.04 billion but 4QFY2021 saw revenue unchanged at $1.07 billion from the previous year, with a 1.4% drop in service revenue. ARPU for mobile was also flat during the quarter despite 300,000 5G subscribers (or 20% of postpaid). Chew, who has kept his “neutral” call and $1.35 target price on the stock, finds that the absence of roaming remains a major headwind for the company.

Meanwhile, StarHub’s cybersecurity segment is “still in investment mode” according to Chew. Although FY2021 revenue for cybersecurity enjoyed a 22% y-o-y jump to $268 million, ebitda was 7% lower y-o-y at $25.5 million. Net profit was almost halved to $1.7 million y-o-y and profitability from this segment was impacted by an inventory write-off of $4.2 million.

Overall, Chew notes that StarHub has made tremendous headway in removing fixed costs while the company’s aggressive cost initiatives have supported earnings.

With most of the cost restructuring almost completed, StarHub needs to invest for growth (DARE+ FY2022 to FY2026 growth roadmap). The current upfront investments in technology and staff are to further digitalise its internal platforms and 5G network. After the completion of these investments, StarHub’s management has guided $220 million in profit opportunities and cost savings of $280 million. Some revenue opportunities after the transformation include cloud gaming and 5G solutions for the enterprise market.

Maybank Securities Singapore’s Kelvin Tan also has a “hold” call on StarHub, although he has increased his target price to $1.45 from $1.25 previously. While FY2021 earnings came in above his expectations and that higher average revenue per user and strong 5G adoption rates are things to cheer about, Tan is cautious over StarHub’s higher upfront capex in executing new growth plans as well as lingering uncertainty over how quickly the regional economies can re-open.

UOB Kay Hian too has a “hold” recommendation with a $1.30 target price. Although the research team likes that good cost discipline, it notes that the better earnings are partly helped by lower depreciation. For now, UOBKH remains somewhat cautious on StarHub’s short term prospects.

“The DARE+ transformation will yield positive cost savings from 2023 onwards, suggesting savings from utilities coupled with new growth strategy including 5G products and services,” says UOB Kay Hian.

DBS Company Research’s Sachin Mittal has maintained his “hold” call on StarHub with a target price of $1.31. He estimates that as StarHub is likely to front-load its $270 million over the next three years, FY2022 might see a 29% y-o-y drop in earnings. However, the bottom line will then grow 36% y-o-y the following year and a further 10% in FY2024.

As such, Mittal expects StarHub to cut its FY2022 dividend to 5 cents from 6.4 cents to be paid for FY2021 but with expectations of a “strong recovery” come FY2023. If the mobile sector undergoes a consolidation in the coming six to 12 months, that is a key catalyst for StarHub, which could then lead to his bull-case target price of $1.55.

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Photo: Samuel Isaac Chua/ The Edge Singapore

StarHub still in investment mode; expects to reap profits in FY2023

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