2021: In Line; Short-term Pain In 2022 For Sustainable Growth
4Q21 core net profit rose 14% yoy and 3% qoq to S$41m, driven by good cost discipline and lower depreciation. 2021 net profit of S$148m (+17% yoy) is in line with expectations. Starhub paid 2021 DPS of 6.4 cents (80% PAT payout) which was above expectations. For 2022, Starhub expects 10% service revenue growth, with EBITDA margin falling to 20% (from 30%) on frontloaded transformation investments. We cut FY22/23 earnings by 12/6%. Maintain HOLD. Target price: S$1.30.
RESULTS
• 2021 results within expectations. StarHub grew 4Q21 core net profit by 14% yoy and 3% qoq to S$41m on the back of good cost discipline and lower depreciation (some planned investments have been deferred to the future). 2021 core net profit of S$148.3m (+17% yoy) is within expectations. The group declared a final DPS of 3.9 cents/share. This brings full-year DPS to 6.4 cents/share, or 80% dividend payout which is higher than our expectation of a 5 cents/share DPS. This translates to a 5% dividend yield for FY22.
• 2022 guidance: Short-term margin compression because of upfront transformation investments… Stepping into 2022, Starhub expects at least 10% service revenue growth. This will be driven by: a) the consolidation of MyRepublic and JOS revenue, b) improved mobile postpaid revenue with higher 5G take up, and c) growth in Ensign and Strateq. That said, higher CAPEX intensity of 12-15% over FY22-23 suggests that EBITDA margin will drop to 20% (2021: 30%) on: a) inflation-induced higher utilities cost, b) 5G wholesale fees, c) upfront investment for IT transformation, and d) higher low-margin enterprise revenue mix. This is to support the DARE+ transformation.
• …but 2023 margin to gradually recover to at least 23%. The DARE+ transformation will yield positive cost savings from 2023 onwards, suggesting savings from utilities coupled with new growth strategy including 5G products and services.
STOCK IMPACT
• Mobile: 4Q21 service revenue rose 3% yoy (flat qoq) to S$138m. Postpaid ARPU grew 3% qoq to S$30/month on higher roaming and higher take up of entertainment Value Added Services (VAS). Prepaid ARPU remained flat at S$10/month. Starhub added 26,000 postpaid subscribers this quarter with increased take-up in the higher margin SIM Only plans. Prepaid subscribers also increased by 10,000 this quarter after declines in three consecutive quarters. Blended ARPUs grew 1% yoy and qoq to about S$23.5/month, reflecting better 5G plans take-up and benign competitive landscape in Singapore.
• Enterprise: 4Q21 revenue eased 3% yoy and 4% qoq with lower contribution from the cyber security and regional ICT amid the absence of major project delivery in the quarter.
• Entertainment: Revenue declined although ARPU increased. Entertainment revenue fell 6% yoy and 1% qoq amid the lower traditional Pay-TV subscribers, offset by stronger OTT subscription. Positively, ARPU improved by S$1/month to S$43/month due to the increased price for HomeHub bundled plans.
• Broadband: To be boosted by consolidation of MyRepublic. Broadband revenue rose 7% yoy but dropped 3% qoq, while ARPU remain flat qoq on a normalised basis. Starhub expects growth moving forward with the wide take-up of mobile-broadband bundle plans and the contribution from MyRepublic. The acquisition of MyRepublic is slated to be completed by end-1Q22.
• 2021 service-to-EBITDA margin (excluding JSS) rose 1ppt yoy to 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.
EARNINGS REVISION/RISK
• We cut FY22/23 earnings by 12/6% to reflect lower EBITDA margin as per guidance.
VALUATION/RECOMMENDATION
• Maintain HOLD with an unchanged DCF-based target price of S$1.30 (COE: 8.5%; terminal growth: 0%). Despite the earnings downgrade, our target price remains unchanged as we rolled over our valuation window to FY22. At our fair value, the stock will trade at 5x 2022F EV/EBITDA, 1SD below its 5-year mean EV/EBITDA of 6.5x. The stock offers a sustainable dividend yield of 4% 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.