Advertisements
  • StarHub guides for cumulative gross profit growth of S$220m plus cost savings of S$280m over the next 5-years.
  • With much of S$270m investment front-loaded in FY22F, there can be significant upside to ours and consensus’ FY23F earnings. 
  • Maintain BUY with unchanged TP of S$1.60 for 25% upside potential and 5% yield. 
Advertisements

DARE+ is different from DARE 1.0 due to its additional focus on growth in gross profits. DARE 1.0, ended in October 2021 and delivered cost savings of over S$270m over 2018-21. However, StarHub’s net profit still fell sharply over 2018-21 due to ~S$250m drop in mobile service revenue and S$90m drop in Pay TV revenue. This was due to intense price competition in the mobile space, structural decline in Pay TV sector further exacerbated by COVID-19 impact on mobile revenue. With DARE+, StarHub targets S$280 million in cost savings plus S$220m in gross profit growth cumulatively between FY2022 and FY2026. A part of this S$500m savings + growth target would be used fund S$270m additional investment over the next 3-years. With mobile service revenue already on recovery, DARE+ efforts would be more visible across StarHub’s earnings as StarHub has not factored recovery in mobile roaming and M&A led growth in its DARE+ targets. 

Advertisements

Where would incremental gross profit of S$220m come from? StarHub expects to grow consumer revenue from services TV+ offering, fixed broadband, cloud gaming etc and enterprise revenue from 5G, cybersecurity and regional ICT services. TV+ offers over-the-top (OTT) channels such as Disney+, Hotstar, iQIYI and OTT games such as Antstream, free to its high-end mobile and broadband subscribers for a period of up to 12 months. This has been possible due to agreements with OTT players such that StarHub will not incur much cost during this free period. On the enterprise side, Ensign InfoSecurity and Strateq are growing well, plus the proposed acquisitions of MyRepublic Broadband and HKBN JOS (Singapore) and HKBN JOS (Malaysia) will further expand its customer base. 

Where would cost savings of S$280m come from? StarHub expects savings from multiple fronts including savings from (i) Operating leases (ii)commission costs and (iii) transactions costs. Operating lease expenses to drop from reduction in retail shop footprints, office and base stations leases. Increased digital sales and automated customer handling will also save sale commissions and transaction costs. 

Advertisements

However, this will also require S$270m in additional investment over the next 3-years. Most of the additional investment will go towards areas like (i) cloud based software systems as StarHub discontinues its legacy platforms to provide a seamless customer experience (ii) 5G network and next generation 5G products  and solutions.We expect almost half of S$270m investments in 2022 and the rest 50% over 2023 & 2024. This is on top of regular capex which is 7-9% of the group revenue. 

Street is likely to upgrade its FY23F/24F earnings and take a more bullish stance on StarHub. We don’t anticipate much change to FY22F earnings due to upfront investment in FY22F. However, there could be significant upside to our FY23F earnings as StarHub guides for gross profit growth of S$80m in FY23F compared to our projection of S$20m growth, implying over 30% upside potential to our FY23F earnings. Currently, we project 10% earnings CAGR over FY21F-23F which may rise significantly if StarHub can deliver on its targets.

Advertisements

Maintain BUY with unchanged TP of S$1.60 for ~25% upside potential & ~5% yield