UOB Kay Hian is keeping its “hold” call on StarHub with a target price of $1.30, as it believes that the stock is currently on stable footing and has a frontload capex to drive its future earnings.
Starhub continues to experience improvement on its operational parameters amid rational competition and increased 5G network rollout. Recent updates from StarHub’s management suggests continued improvements across all segments.
On the mobile front, prepaid competition remains rational while postpaid likely benefitted from the onset of 5G network rollout. “This, we believe, will help to partly address average revenue per user (ARPU) dilution from SIM-only plans as postpaid ARPUs have been stable since 1QFY2021. We also expect higher take-up of 5G mobile plans (5G ARPUs are estimated to be 1.2 times higher than 4G ARPUs),” says analysts Chong Lee Len and Chloe Tan Jie Ying in a Jan 25 report.
In addition, Chong and Tan believe that Starhub’s cross-products bundling strategy is expected to help create customers’ stickiness as anecdotally, the HubBundle plan (integrated mobile, broadband, Netflix and Disney+) saw encouraging adoption since it was launched in September 2021.
On the other hand, StarHub has also been driving sustainability through enterprise convergence. It has acquired Ensign (cybersecurity), Strateq (regional ICT), JOS (ICT), and MyRepublic (enterprise broadband) over the years to help strengthen its converged business solution (5G, cloud, security).
Thus far, the gradually improving business sentiment paved the way for Ensign to register a 14% y-o-y revenue growth while operating profit grew to $6.8 million in 9MFY2021 ended September 2021, compared to $0.7 million in 9MFY2020. At this juncture, Ensign’s orderbooks remained strong (positive public sector contribution) and it is estimated that it has an 18% market share in Singapore.
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With that, Ensign is poised to benefit from a five-year 36% CAGR growth for cloud security by 2024, according to Gartner. The analysts expect Starhub to continue looking for strategic partnerships to move up its value chain for sustainable growth.
Currently, StarHub has a budget of $270 million (capex and opex) over FY2022-FY2024 for digital platforms and 5G network rollout.
Including the $26.3 million (shared with M1) 2.1 GHz 5G spectrum fee, a total of about $300 million frontloaded investments are expected to materialise in the near-term. Despite frontloading capex, Starhub remains committed to its 5 cent or 80% dividend payout policy, and is looking to grow in dividends with its profit growth.
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“We expect Starhub to frontload capex to drive cost and product efficiency to achieve an additional cumulative $220 million in gross profit over FY2022-FY2026 (4% incremental profit annually),” says the analysts.
As at 1.35pm, shares in StarHub are trading at $1.30 or 15.7 times FY2021 earnings with a dividend yield of 3.5%.
