3Q23: Strong Results, Driven By Broad-based Growth
For 9M23, StarHub reported higher service revenue (+8.2% yoy) and core PATMI (+29.1% yoy) from broad-based growth across all business segments. This was also supported by a robust 3Q23 with service revenue and PATMI growing 8.9% yoy and 36.1% yoy respectively. However, margins are expected to soften going into 4Q23 from increased DARE+ investments. Maintain BUY with an unchanged target price of S$1.37.
• Results in line with expectations. For 9M23, StarHub reported stronger headline revenue (+8.2% yoy) and core PATMI (+29.1% yoy), both forming 72.6% and 80.5% of our full-year forecasts respectively. The robust performance was driven by a strong 3Q23, whereby both headline revenue (+5.3% yoy, +13.4% qoq) and core PATMI (+36.1% yoy, -4.8% qoq) grew, driven by strong revenue growth from most business segments coupled with delays in DARE+ investments. Similarly, 3Q23 service revenue (+8.9% yoy, +10.4% qoq) and service EBITDA grew (+6.7% yoy, -2.5% qoq). As mentioned in our last update, we expect 2H23 PATMI to moderate sequentially given an estimated S$90m (1H23: S$30m) of DARE+ transformative investments expected in 2H23. This led to 9M23 (-1.4ppt yoy) and 3Q23 (- 0.4ppt yoy, -2.7ppt qoq) service EBITDA margins falling. It was noted that the bulk of the expected S$90m DARE+ investments for 2H23 is expected to be incurred in 4Q23, and is likely to soften StarHub’s expected 2023 PATMI nearer to our full-year estimates.
• 2023 guidance: No changes. Driven by strong contributions from all business segments, 9M23 service revenue growth of 8% yoy has exceeded StarHub’s 2023 guidance. In our view, we expect StarHub to maintain this strong momentum into 4Q23. Based on our estimates, we expect 2023 and 4Q23 service revenue to grow 8.4% yoy and 8.9% yoy respectively, exceeding StarHub’s 2023 guidance. However, we reckon that there may be downside risks to StarHub’s service EBTIDA margin guidance. Given that 3Q23 service EBTIDA margin was 20.2%, we expect 4Q23 service EBTIDA margin to moderate sequentially due to higher upcoming DARE+ transformative costs. Potential upside may come from improved operating performance along with realised operational efficiencies from ongoing DARE+ initiatives. Lastly, as mentioned, we expect StarHub’s capex commitment to meet 2023 guidance in 4Q23.
• Mobile: Boost from roaming. Excluding an S$1.7m one-off revenue gain in 1H22, 9M23 mobile revenue would have grown by 11.3% yoy. 3Q23 postpaid ARPU remained stable qoq but grew yoy to S$32/month (3Q22: S$31/month), on the back of higher roaming revenue and take-up of value-added services. Management noted there was still further recovery upside for roaming revenue as global tourism has not fully recovered. Postpaid subscribers continue to grow (+36,000 yoy, +2,000 qoq) as the strong uptake of its GIGA! plans continues. Average monthly churn rate remained low at 1.0% in 3Q23 (2Q23: 0.8%). Due to stiff competition and increased promotions, prepaid ARPU dipped slightly yoy from S$8/month to S$7/month but was flat qoq. Despite growing 1,000 yoy, 3Q23 prepaid subscribers dipped by 20,000 qoq largely due to the cessation of a promotion.
• Entertainment: EPL boost. ARPU was higher yoy at S$45/month (3Q22: S$41/month, 2Q23: S$45/month), largely driven by the English Premier League (EPL) that commenced in 3Q22. Despite a 40,000 yoy loss in total subscribers, 3Q23 revenue increased 2.4% yoy due to higher subscription, commercial TV and advertising revenue. However, on a qoq basis, 3Q23 revenue dipped slightly by 0.2%, dragged by an 8,000 qoq drop in subscribers.
• Enterprise: Driven by cybersecurity services. Similar to 2Q23, 3Q23 enterprise revenue surged (+14.8% yoy, +22.8% qoq), solely driven by higher cybersecurity services revenue (+45.1% yoy). However, this was offset by weaker revenue from network solutions (-3.2% yoy) and regional ICT services (-0.1% yoy).
• Broadband: Increasing competition. Post-consolidation of MyRepublic Broadband in 2Q22, ARPU remained stable at S$34/month (3Q22/2Q23: S$34/month). Despite total subscribers growing (+3,000 yoy, +2,000 qoq), 3Q23 revenue softened slightly (-1.9% yoy, – 0.3% qoq) on the back of intensifying market competition and reduced promotions. However, it was noted that the segment had better profitability in 3Q23 and the group maintained its broadband market leadership.
• We make no changes to our 2023-25 PATMI forecasts.
• Maintain BUY with an unchanged DCF-based target price of S$1.37 (COE: 8.4%; terminal growth: 1%). At our fair value, the stock will trade at 6x 2023F EV/EBITDA, -1SD below its five-year mean EV/EBITDA of 7x; it also offers a decent dividend yield of 4.8% for 2023.
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• Market consolidation – exit of Mobile Virtual Network Operators (MVNO).
• 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.