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Ongoing transformation curbs StarHub's earnings recovery; dividends lend support for now

Samantha Chiew
Samantha Chiew2/9/2023 10:50 PM GMT+08  • 5 min read
Ongoing transformation curbs StarHub's earnings recovery; dividends lend support for now
StarHub’s revenue saw across-the-board growth for FY2022. Photo: Bloomberg
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Thanks to across-the-board growth, StarHub CC3 %

was able to increase its revenue for FY2022 by 13.9% y-o-y to $2.3 billion. However, as part of its ongoing multi-year business transformation requiring further spending commitments, the telco’s earnings for the same year ended December 2022 were down 58.3% at $62.2 million versus FY2021.

Dubbed DARE+, the transformation and growth plan kicked off in November 2021, and FY2022 was the first completed full year of this five-year roadmap.

StarHub’s revenue was partly lifted by the consolidation of acquired stakes in enterprise business JOS and the Singapore broadband business of MyRepublic. However, the telco was able to chalk up organic growth too in its other key business segments such as mobile, which is seeing some recovery from roaming, as well as sales of equipment.

However, the DARE+ initiative drove operating expenses higher, which resulted in service ebitda coming in 21.1% lower y-o-y in FY2022 to $379.4 million. In FY2021, StarHub had already guided for lower service ebitda margin of 20% in FY2022, compared to 29.8% in FY2021, as it entered into its DARE+ transformation.

“We are looking forward to recovery in our service ebitda with transformation and acceleration in FY2023,” says CEO Nikhil Eapen at the results briefing on Feb 7.

Overall, earnings suffered due to lower profit from operations and higher non-operating expenses from impairment losses of certain legacy network assets, coupled with goodwill and intangible assets from Strateq, an enterprise tech business based in Malaysia acquired back in 2020 for $82 million. This was slightly offset by higher non-operating income relating to the fair value gains in forward liability of Strateq and contingent consideration of MyRepublic Broadband.

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Apart from service ebitda margins meeting its FY2022 guidance, StarHub has met or exceeded all of its expectations for FY2022. Service revenue exceeded expectations as it increased by 17.2% y-o-y to $1.89 billion, compared to 12%-15% projected in November 2022. Capital expenditure commitment, in terms of percentage of total revenue, was better than expected, coming in at 7.3% including investments, compared to its guided 9%–12%. The company also met its dividend guidance, distributing a total of five cents in FY2022, which is the same as the amount paid for FY2021.

For FY2023, StarHub expects its service revenue to increase by about 8%– 10%, service ebitda margin to also come in at about 20%, and capital expenditure commitment including investments to range from 13% to 15% of total revenue. For investors still holding on to the stock for its dividends, they can expect to receive at least five cents for the year — in line with the current dividend policy.

However, investors need to brace themselves for further spending requirements as the telco upgrades its systems and infrastructure for the next phase. “We have updated that our expected investments for DARE+ are likely to increase to $310 million from the $270 million we guided previously [due to investments for Cloud Infinity network transformation] and as at end-2022, we have incurred about 35% of that number, including provisions,” says CFO Dennis Chia.

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Chia adds that the bulk of the investments will be incurred in FY2023 and some residual amount will be incurred in FY2024. Chia expects the fullyear impact of the DARE+ initiative to show results in FY2024.

Analysts’ take

Overall, analysts are somewhat neutral on StarHub following its FY2022 results, although there is slight upward revision of their target prices.

RHB Group Research, for one, is staying “neutral” but with a revised target price of $1.11 from $1.07, which partly takes into account a 2% ESG premium accorded to StarHub. Nonetheless, with the transformation still a “work in progress”, RHB’s preferred pick for the local telco sector remains Singapore Telecommunications.

Citi Investment Research’s Arthur Pineda and Luis Hilado note that StarHub’s earnings have fallen short of expectations. However, they are telling investors not to be “swayed by the bottom-line shock”, as the dividend guidance of five cents translates into a “healthy yield” which will protect against “material downside”. As such, they are not only keeping their “neutral” call, but have also raised their target price to $1.10 from $1.

Maybank Securities has joined the consensus and downgraded its call on StarHub to “neutral” from “buy” previously, while lowering target price to $1.15 from $1.33. Analyst Kelvin Tan says that FY2022 ebitda and patmi missed his and consensus expectations. “We anticipate StarHub’s earnings recovery will be delayed to FY2024 due to higher transformation opex pushed for DARE+ in FY2023,” says Tan, while reducing his bottomline forecast to reflect lumpy capital expenditure and operating costs to be incurred.

Despite a weaker short-term performance, StarHub has assured a dividend of five cents, or 80% of net profit, implying a decent 5% yield to reward investors waiting for recovery. “We think StarHub is well-placed to look for M&A opportunities to accelerate growth and create new revenue streams in the diluted enterprise segment,” says Tan.

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UOB Kay Hian, on the other hand, is more bullish as it has kept its “buy” recommendation with a higher target price of $1.35, up from $1.30 previously. Analysts Chong Lee Len and Llelleythan Tan are upbeat on StarHub’s future prospects as they expect the company to reap rewards from its investment in FY2024 onwards. They also like the boost StarHub is experiencing from all of its business segments, as well as its “sustainable dividend yield” of 4.5% for FY2023.

Photo: Bloomberg

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