StarHub’s 2Q20 results came in below analysts’ expectations, which caused an overall “neutral” sentiment on the stock.
For 2Q20, StarHub saw earnings drop from 5.6% y-o-y to $37.3 million, while revenue fell 18% to $99.4 million from the previous year.
The decline in figures was primarily attributable to lower contributions from StarHub’s Mobile, Pay TV, Broadband and Sales of equipment segments. This was partially offset by higher contributions from its Enterprise Business segment.
What was most disappointing was that StarHub had cut its interim divided by some 45% to 2.5 cents during the period, but it still guided for FY20 full-year dividends to be at least 5 cents.
This is a further cut from FY19’s dividend yield of 9 cents per share a year, which dropped from its peak of 20 cents, which was last declared in FY16.
See: StarHub posts 5.6% drop in 2Q20 earnings to $37.3 million on lower revenue
Furthermore, StarHub’s CEO Peter Kaliaropoulos announced that he will be retiring after just two years at the helm, with effect from Oct 31. The 61-year-old cited an unforeseen medical emergency within his family for his early retirement.
In the meantime, the search for a new CEO is still ongoing. That means, StarHub will be seeing a change in management soon.
See: StarHub CEO Kaliaropoulos to retire, search for new chief ongoing
PhillipCapital is keeping a “neutral” stance on StarHub with a target price of $1.24.
Apart from the earnings miss and cut in dividends, analyst Paul Chew notes in an Aug 11 report that Cybersecurity operating losses widened to $7 million in 2Q20. But this is a seasonally weaker quarter for the cybersecurity segment as most government contracts are completed in March.
Furthermore, the company is still investing in the business especially on regional capabilities. And the enterprise business is faced with a decline in projects and delayed spending, especially in managed accounts.
“We were surprised by the 25% y-o-y fall in managed services revenue as it was supposed to be the annuity segment on the enterprise business,” says Chew.
On the bright side, StarHub’s PayTV segment saw unchanged revenue from the previous quarter at $46.9 million. The contraction in subscribers is now at 2,000 to 3,000 per quarter compared to the average 20,000 per quarter in FY19. StarHub even managed to eke out a modest $1 q-o-q rise in average revenue per user (ARPU) to $39.
Nonetheless, the overall outlook for StarHub looks grim for at least the next two years, as the loss in roaming and tourism-related revenue cannot be replaced until the international borders are reopened. It is also currently unclear how much 5G can help lift ARPU for StarHub.
DBS Group Research shares the same sentiments as it keeps it holds its “hold” call on StarHub with a lowered target price of $1.16 from $1.37 previously.
In an Aug 11 report, analyst Sachin Mittal says, “We have slashed StarHub’s earnings forecasts for FY21/22 by 7%/14% as we are of the view that mobile services revenue will be heavily impacted due to SIM-only plans and heightened competition. While we believe that TPG does not have a business case in Singapore, the recent capital injection of about $170 million into TPG might help it to sustain for another two years and industry consolidation could be delayed to FY22.”
“While 5G-related capex is less than our expectations, these savings might not translate into dividends if StarHub chooses to go for acquisitions,” adds Mittal, as he reduces FY20/21 dividend per share (DPS) to 5.9 cents from 7.3 cents and 6.9 cents respectively, based on StarHub’s revised dividend payout of 80% from FY20 onwards to help it ride out its cashflow strains.
On the outlook, StarHub’s enterprise business is expected to be led by a turnaround in the cyber security segment and acquisitions from FY20, as it is frontloading research and development and talent acquisition costs whose benefits are expected to be reaped in FY21.
On the other hand, CGS-CIMB Research is more bullish on the stock as it maintains its “add” recommendation on StarHub with a lowered target price of $1.60 from $1.70.
In an Aug 7 report, lead analyst Foong Choong Chen sees 2Q20 earnings were largely in line with estimates, although DPS was a miss.
Foong is more positive on StarHub’s outlook in the 5G space as the group has guided for its initial investment for 5G rollout to be about $200 million over five years, which which includes its 50% share of the StarHub-M1 joint venture company’s (JVCo) capex for radio and spectrum, as well as its own capex for building a 5G core network.
“This is lower than our previous estimate of $300 million to $350 million and is a pleasant surprise. StarHub says the capex will be funded 85%/15% by debt/equity and will be front-loaded. Hence, we now assume 60% will be spent in 2H20-FY21, with the remaining 40% in 2022-2025,” says Foong.
As at 1.05pm, shares in StarHub are trading at $1.22 or 5.8 times FY20 book with a dividend yield of 4.9%, according to estimates from DBS.
