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3Q21: In Line; ARPU Stabilises With Encouraging 5G Takeup

StarHub delivered 3Q21 core net profit of S$40m (+5% yoy; 7% qoq) driven by sequentially higher service revenue as well as enterprise and broadband revenue. The results were commendable as 9M21 earnings came in within expectations, accounting
for 75% of our forecast. Separately, Starhub announced that it is acquiring a 60% stake in HKBN JOS for S$15m (or 7x EV/EBITDA) and it is to grow the regional ICT business. Maintain HOLD with a target price of S$1.30.

RESULTS

• 9M21 results within expectation. StarHub reported 3Q21 core net profit of S$40m (+5% yoy, +7% qoq) on the back of a 2% qoq growth in service revenue (aided by encouraging 5G subscriber and ARPU base) as well as higher contribution from the fixed enterprise and the residential broadband segments. 9M21 core net profit of S$107.3m (+6% yoy) came in within our expectation, accounting for 75% of our full-year forecast. 5G subscriber base formed 17% of Starhub’s 1.4m postpaid subscribers in Sep 21.

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STOCK IMPACT

• Mobile: 3Q21 service revenue rose 2% qoq (flat yoy) to S$133m. Postpaid ARPU grew 4% qoq to S$29/month due to higher roaming, plan subscriptions, and higher revenue from 5G packages. Prepaid ARPU remained flat at S$10/month. Starhub added 16,000 postpaid subscribers base this quarter due to an increased take-up in the higher margin SIM Only plans. Prepaid subscribers fell by 50,000 amid COVID-19 travel restrictions and migration towards SIM Only plans. Blended ARPUs grew 3% yoy and 4% qoq to about S$23/month, reflecting better 5G plans take-up and benign competitive landscape in Singapore.

• Enterprise: 2Q21 revenue jumped 17% yoy and 6% qoq on the back of higher contribution from the cyber security revenue that jumped to S$79.3m in this quarter (2Q21: S$73.4m; 3Q20 S$45.8m) due to stronger business demand in Ensign as the economy
reopens. The cybersecurity segment also recorded an operating profit of S$6.8m for 9M21 versus S$0.7m a year ago. Additionally, the higher revenue yoy also includes the revenue contribution from regional ICT revenue – Strateq (acquired on 30 Jul 20) at S$20.6m.

• Pay-TV: Revenue declined although ARPU increased. Pay-TV’s revenue fell 5% yoy and 1% qoq amid the lower subscriber base and lower commercial and advertising contribution. Positively, ARPU improved yoy and qoq at S$43/month due to the increased
price for HomeHub bundled plans.

• Broadband: Resilient underlying demand. Broadband revenue continued to rise 10% yoy and 3% qoq thanks to robust demand for high-quality broadband amid the stay-home norm and reduced discounts extended to customers. ARPU inched up to S$34/month due to reduction in subscription discounts and increased take-up in higher tier plans.

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• 9M21 service-to-EBITDA margin (excluding JSS) stabled at 30%, reflecting: a) ongoing cost optimisation initiatives – leading to better business margin for Pay-TV and broadband, b) lower content cost; and c) lower marketing and promotion expenses.

• Acquisition of JOS is expected to be earnings accretive. StarHub has acquired a 60% stake in the Singapore and Malaysia businesses of JOS for S$15m. The deal is designed to accelerate the regional and enterprise expansion in partnership with Hong Kong Broadband Network (HKBN). The transaction is priced at 7x EV/EBITDA. Starhub expects the deal to be earnings accretive (adding S$2m to EBITDA, or <1%) with potential cost synergies stemming from the consolidation of office/warehouse space for rental savings and joint procurement strategies.

EARNINGS REVISION/RISK

• None.
• Management guided for more encouraging EBITDA margins and lower capex as there are some deferment in capex into 2022.

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VALUATION/RECOMMENDATION

• Maintain HOLD with a DCF-based target price of S$1.30 (COE: 8.6%; terminal growth: 0%). At our fair value, the stock will trade at 6x 2021F EV/EBITDA, 1SD below its 5-year mean EV/EBITDA of 8.5x. The stock offers a sustainable dividend yield of 4.8% for 2022.

SHARE PRICE CATALYST

• A key re-rating for the stock includes the return of tourists to Singapore.
• Market consolidation – exit of MNVOs.
• Potential network carved out/shifted to an asset-light business model (sale and leaseback of network). Management is of the opinion that the cost of capital from the capital market is much more attractive vs the leasing model at this juncture.
• Faster-than-expected 5G adoption and new business cases in Singapore.