CGS-CIMB Research analysts have kept their "hold" call and $1.19 target price on StarHub CC3 following the divestment of its cryptographic subsidiary D'Crypt to ST Engineering.
Besides an initial sale price of $67.5 million, the price tag might go up to $87.4 million after taking into account adjustments for net cash, working capital and earn-out due upon meeting certain milestones.
StarHub expects to book a loss on disposal of some $10 million upon completion of the deal, which is expected in 1QFY2024.
As explained by StarHub, the sale of D'Crypt will let it focus its resources on its cybersecurity unit Ensign, which can be more easily scaled as part of StarHub's overall platform-based offerings for enterprise customers.
Ensign, held in a joint venture with Temasek, is also a platform for StarHub to expand its overseas presence and pursue potential M&A opportunities where available. Ensign has also been steadily expanding its in-house offerings which fetch better margins than reselling external products.
"We think that the divestment could improve the recurring revenue mix coming from cybersecurity, as we understand that D’Crypt typically focuses on defence-related projects which are lumpy in nature," write CGS-CIMB analysts Kenneth Tan and Lim Siew Khee, in their Dec 13 note.
Given the relatively small proportion, or 9% of EBIT contributed by Ensign to StarHub, Tan and Lim believe it will take time for growth initiatives to translate into meaningful earnings growth.
Given the 'uncertain" earnings growth pace in the coming FY2024, the analysts have for now reiterated their "hold" call.
DBS Group Research is slightly more upbeat. In its Dec 13 note, DBS points out that Ensign, while loss-making, is experiencing rapid revenue growth of 30% CAGR over the past five years.
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More critically, Ensign, in which StarHub holds an effective stake of 55.73%, plays a "pivotal" part in StarHub's enterprise business of offering cloud, cybersecurity and connectivity.
Based on the peer average of 4-6x for cybersecurity companies, and assuming a conservative 2-3x price to FY203 revenue(excluding D’Crypt), DBS estimates the value of StarHub's Ensign stake to be worth $330 million to $500 million, equivalent to between 17-26% of StarHub’s current market cap of $1.9 billion.
