Pushing back Dare+ spending
- 3Q23 net profit of S$37m (+36% yoy) was a beat on lower Dare+ costs. YTD capex is at 7% of revenue (FY23F guidance: 11-13%).
- We believe Dare+ transformation costs could increase in 4Q23F or potentially into FY24F, which would continue to weigh on operating margins.
- Reiterate Hold as we remain cautious ahead of more clarity on the pace of Dare+ spending during the group’s investor day on 28 Nov 23.
3Q23: strong cybersecurity growth, lower Dare+ costs
StarHub’s 3Q23 net profit of S$37m (-5% qoq, +36% yoy) was above expectations, bringing 9M23 net profit to 97% of our and 91% of Bloomberg consensus FY23F forecasts. The beat was due to slower-than-expected execution of Dare+, allowing 3Q23 service EBITDA margin to remain stable at 20.2% (3Q22: 20.6%). Revenue growth was decent (+13% qoq, +5% yoy), driven by 1) solid cybersecurity revenue growth (+52% qoq, +45% yoy), and 2) continued postpaid revenue recovery (flat qoq, +6% yoy); management reiterated its FY23F service revenue growth guidance of 3-5% yoy.
More Dare+ costs likely deferred to 4Q23F and FY24F
Recall that StarHub had previously guided (in its 1H23 results) for S$120m in transformation costs for FY23F, with S$30m having already been incurred in 1H23. YTD capex (inclusive of Dare+ costs) stands at 7% of revenue as compared to FY23F guidance of 11-13%. We think this implies either 1) 4Q23F spending could come in at c.S$65m-70m (vs. c.S$50m-55m in 9M23), and/or 2) further delays going into FY24F. We lift our FY23F EPS by 14% to reflect lower depreciation expenses from slower spending. We await more clarity on the pace of Dare+ spending during the group’s investor day on 28 Nov 23.
Stable subs growth, back-weighted enterprise should help
Subs growth was stable in 3Q23, with postpaid subs up 2% yoy and prepaid subs flat. StarHub intends to increase its focus on offering higher-tier plans to mobile subs as opposed to competing in the lower-end segment, while acknowledging that competition in the sector is still significant. StarHub remains positive on the longer-term outlook for cybersecurity and said that its pipeline of projects remain strong. We understand the group’s current enterprise projects are back weighted in 2H23F, giving us greater visibility of enterprise revenue remaining elevated in 4Q23F.
Reiterate Hold at unchanged TP of S$1.15
We maintain Hold given that we are uncertain on the pace of Dare+ spending, which could intensify ahead, in our view. Our TP is kept at S$1.15, still based on DCF (WACC: 7.8%). Upside risks include lower Dare+ costs, faster transformative efficiencies, and mobile market consolidation. Downside risks include stiffer competition in mobile and broadband, and cost overruns.