Three engines to power growth

  • Fixed broadband to benefit from migration to higher speed plans; coupled with lower content costs to improve margins as seen by the US cable companies  
  • Cybersecurity and Regional ICT services to benefit in 2022 from re-commitment of postponed projects.
  • FY21F/22F earnings raised 3%/7%, BUY with higher TP of S$1.60 for ~28% upside potential & ~5% yield

Investment Thesis: 

Three engines of sustainable growth. Starub offers 10% annual earnings growth over FY21-23F led by (i) recovery from the pandemic in FY22F, reversing five years of decline from mobile services (ii) sustained growth in fixed broadband business as consumers shift to higher speed plans while content costs for TV business are reigned in (iii) growth of cybersecurity & regional ICT services

Trading below its 5-year historic Price to Earnings ratio (PER) of 15.5x; We expect the stock to re-rate towards its +2 SD (standard deviation) PER of 18.1x with revival of earnings growth after 5-years of decline. StarHub offers FY21F/22F dividend yield of 4.9/5.4% based on an 80% payout ratio. 

Potential catalyst: Consolidation in the mobile sector. Any mobile sector consolidation in the next 6-12 months could be a key catalyst, leading to our bull-case TP of S$1.76.

Valuation:

Maintain BUY with higher TP of S$1.60. We raise FY21F/22F earnings by 3%/7% due to a healthy growth in fixed broadband average revenue per user and lower content cost. Our DCF valuation of S$1.60 (prev S$1.44) is based on WACC of 7.3% & terminal growth rate of 0%.

Where we differ:

Our FY21F/22F earnings are ~4% below consensus each. Despite an upward revision, our FY21F/22F earnings are still ~4% below consensus each due to our lower service EBITDA margin assumption of 28%/27% in FY21F/22F compared to 31% in FY20. 

Key Risks to Our View:

Bull-case valuation of S$1.76 and bear-case valuation of S$1.20. Our bull-case scenario may materialise if there is industry consolidation over the next six months, leading to FY21-23F earnings CAGR of 12%. Our bear-case scenario may materialise if any rise in competition leads to flattish earnings over the next few years.  

Share price as on 27/10/2021

Three engines of sustainable growth. StarHub offers 10% annual earnings growth over FY21-23F led by (i) recovery from the pandemic in FY22F, reversing five years of decline from mobile services (ii) sustained growth in fixed broadband business as consumers shift to higher speed plans while content costs for TV business are reigned in (iii) growth of cybersecurity & regional ICT services

Trading below its 5-year historic Price to Earnings ratio (PER) of 15.5x; We expect the stock to re-rate towards its +2 SD (standard deviation) PER of 18.1x with revival of earnings growth after 5-years of decline. StarHub offers FY21F/22F dividend yield of 4.9/5.4% based on an 80% payout ratio. 

Potential catalyst: Consolidation in the mobile sector. Any mobile sector consolidation in the next 6-12 months could be a key catalyst, leading to our bull-case TP of S$1.76

Valuation

Maintain BUY with higher TP of S$1.60. We raise FY21F/22F earnings by 3%/7% due to a healthy growth in fixed broadband average revenue per user and lower content cost. Our DCF valuation of S$1.60 (prev S$1.44) is based on WACC of 7.3% & terminal growth rate of 0%.

DCF

Where we differ

Our FY21F/22F earnings are ~4% below consensus each. Despite an upward revision, our FY21F/22F earnings are still ~4% below consensus each due to our lower service EBITDA margin assumption of 28%/27% in FY21F/22F compared to 31% in FY20. 

Key Risks to Our View

Bull-case valuation of S$1.76 and bear-case valuation of S$1.20. Our bull-case scenario may materialise if there is industry consolidation over the next six months, leading to FY21-23F earnings CAGR of 12%. Our bear-case scenario may materialise if any rise in competition leads to flattish earnings over the next few years.