HOLD for 4% yield till growth resumes in 2023
- FY21 net underlying profit of S$148.3m (+17% y-o-y) was 11% ahead while 6.4Scts DPS was 4% above our expectations on margin beat
- StarHub has guided for 20%+ service EBITDA margins in FY22F compared to 29% in FY21 – high opex component of investments is a big surprise
- Downgrade to HOLD with a lower TP of S$1.31 as we cut FY22F/23F earnings by 29%/13%
Investment Thesis:
StarHub to front-load big investments in FY22F, which will start paying off from FY23F onwards. StarHub will invest S$270m on digital platform & 5G network over the next 3-years. The bulk will be front-loaded in FY22F, and benefits will accrue from FY23F onwards. A big portion of these investments will be treated as an operating expense, which might lead to 29% earnings decline in FY22F, followed by 36%/10% growth in FY23F/24F on our estimates.
We project dividend per share (DPS) of 5 Scts in FY22F (vs 6.4 Scts in FY21) before a strong recovery in FY23F. StarHub is committed to pay a min of 5 Scts DPS or 80% of its recurring net profit in FY22F and FY23F each, whichever is higher.
Potential catalyst: Consolidation in the mobile sector. Any mobile sector consolidation in the next 6-12 months would be a key catalyst, leading to our bull-case TP of S$1.55
Valuation:
Downgrade to HOLD with a lower TP of S$1.31. Our DCF valuation is reduced to S$1.31 (prev S$1.60), based on WACC of 7.5% (previously 7.3%) & terminal growth rate of 0%. This is mainly due to 29%/13% cut in our FY22F/23F earnings and higher WACC from potentially higher beta.
Where we differ:
Street’s FY22F/23F earnings could be cut 35%/20%. Management has guided service EBITDA margins to exceed 20%/23% in FY22F/23F (vs 29% in FY21); we project 23%/25% margins.
Key Risks to Our View:
Bull-case valuation of S$1.55 and bear-case valuation of S$1.00. 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 FY23F earnings growth is just 10%.