9M21 earnings 5% above our expectations on margin beat
- 9M21 net profit of S$107m (+6% y-o-) was 5% above our expectations due to EBITDA margin beat.
- Mobile service revenue recovered 2.4% q-o-q while capex guidance lowered to 7-9% of total revenue (previous 9-11%), a small acquisition to enhance ICT business in Singapore and Malaysia.
- Maintain BUY at a TP of S$1.60 with a ~26% upside potential and a dividend yield of 5.4% (based on FY22F DPS).
9M21 earnings exceed our expectations on service EBITDA margin surprise. StarHub (STH) reported 9M21 net profit of S$107.4m (+6.0% y-o-y) excluding job support scheme (JSS) payouts, which was 5% above our 9M21F estimate of S$102m. A better-than-expected service EBITDA margin of 29.8% in 9M21 (30.1% in 3Q21) compared to our FY21F estimate of 27.8%, resulted in the earnings surprise. Operating expenses increased by only 2.3% y-o-y to S$1,331.6m compared to a 2.9% y-o-y increase in total revenue to S$1,491m resulting in a service EBITDA excluding JSS payout of S$356.3m (+1.1% y-o-y) in 9M21. STH’s disciplined approach to opex and numerous cost improvement initiatives have supported the efficiency during 9M21.
9M21 service revenue was inline, supported by growth in broadband and enterprise and sequential recovery in mobile segment. STH recorded service revenue of S$1,197.6m (+2.4% y-o-y) in 9M21, representing 74% of our FY21F estimate of S$1,622.3m. While 9M21 mobile service revenue declined by 11% y-o-y to S$393.1m, 3Q21 mobile service revenue recovered 2.4% q-o-q driven by rising postpaid ARPU and subscriber base. In 3Q21, postpaid subscriber base stood at 1.5m (+1.0% q-o-q) and postpaid ARPU improved to S$29 (S$28 in 2Q21) due to increasing take-up of higher margin SIM only plans, higher roaming, and higher 5G enterprise initiatives.
Mobile services revenue has started to improve 2.4% q-o-q to S$133.3m exhibiting recovery
Source: Company, DBS Bank
Postpaid ARPU remained steady q-o-q in 3Q21
Source: Company, DBS Bank
Broadband revenue increased by 11.4% y-o-y to S$145.4m, led by higher ARPU of S$34 in 3Q21 (S$32 in 2Q21), from rising take up of 2 Gbps plans and faster WiFi routers. STH’s entertainment revenue for 9M21 stood at S$135.5m (-3.8% y-o-y) along the expected lines due to lower Pay TV subscriber base (decrease of ~9,000 subscribers to ~287,000 in 3Q21). However, the entertainment segment is witnessing a rise in OTT (over-the-top) subscribers where the total OTT subscriber count for 9M21 stood at ~121,000 (q-o-q net add of ~29,000). STH’s enterprise segment reported 9M21 revenue of S$523.5m (+14.4% y-o-y) supported by resilient growth in cybersecurity and regional ICT services. Cybersecurity and regional ICT services reported operating profit of S$6.8m and S$0.8m in 9M21. As of 9M21, cybersecurity services and regional ICT services represented 48.2% of enterprise revenue.
STH acquires 60% of HKBN JOS Holding, a financially accretive acquisition. To expand the regional ICT services and thereby expanding its enterprise business, STH acquired a majority stake (60%) in HKBN JOS (both the Singaporean and the Malaysian units), at an estimated total consideration of S$15m, fully financed by cash. JOS is a leading system integrator and ICT solutions provider, which matches the profile of STH’s regional ICT and enterprise segment offerings. JOS has a customer base of over 1,500 and employs over 400 talents in its four offices in Singapore, Kuala Lumpur, Johor Bahru, and Penang. The acquisition of JOS is also expected to reap cost synergies in fixed operating costs and improved supply chain. Between StarHub and JOS in Singapore as well as between Strateq and JOS in Malaysia, the companies can cross sell their Ensign and D’Crypt offerings and expand their customer channels in Singapore, Hong Kong, and Malaysia.
Capex guidance lowered for FY21F. Earlier capex guidance (excluding 5G capex and spectrum rights) was supposed to be 9-11% of the total revenue. However, owing to the ongoing transition of IT related capex to cloud-based opex model paired with other capex delays, the capex guidance for FY21F has been lowered to 7-9% of total revenue.
No change in our FY21F estimates. STH’s service EBITDA margin (ex. JSS payout) for 9M21 at 29.8% was higher than our FY21F forecast of 27.8%, prompting us to revisit our outlook. However, the management expects more advertising, promotions, IT repairs and maintenance costs to be incurred in 4Q21F. Hence, we are not raising our FY21F earnings of S$133m yet.
Maintain BUY with a TP of S$1.60 for ~26% upside potential and a dividend yield of 5.4% (based on FY22F DPS).