UOB Kay Hian analysts Chong Lee Len and Chloe Tan have upgraded telecommunications company StarHub to “buy” due to recovery trends in 2H20.
The target price on the telco, however, have remained unchanged, as its share price has fallen 18% year-to-date.
“We believe 2020 weak earnings have been largely factored in as the stock is currently trading close to -2SD below its mean EV/EBITDA of 8.6x. At our target price, the stock trades at 6.7x 2021F EV/EBITDA, or -1 standard deviation (SD) below mean valuation,” say the analysts.
Chong and Tan note that while StarHub has reinstated its earnings guidance to project a 10-12% y-o-y decline in service revenue (compared to the 4% decline y-o-y in 2019), the company expects its 2020 earnings before interest, taxes, depreciation, and amortization (EBITDA) margin to remain stable at 27-29%.
Investors can also expect a “decent dividend yield” from the company as it guides 2H20 dividends potentially exceeding the 2.5 cents paid in 1H20 due to the result of a deferment in capital expenditure (capex) and cost to-date.
“We project 2020 and 2021 net distribution per share (DPS) of 5.5 and 6 cents respectively, based on a 60% dividend payment. These translate into net dividend yields of 4.7% and 5.2% respectively,” say Chong and Tan.
In comparison, the dividend payout for 2019 was 87%.
The analysts are also buoyant on StarHub’s prospects as the economy reopens. The telco is expected to resume customer acquisition activities, reactivate marketing plans, and launch new products that will help it defend its market share going into 2021.
StarHub, on August 17, launched its 5G package in Singapore, being the first telco in the country to do so.
See: StarHub customers first to experience 5G network in Singapore
“At this juncture, we believe the average revenue per user (ARPU) uplift from the 5G roll-out will be limited as consumers are unlikely to migrate to a premium 5G-pricing services when the existing 4G/LTE networks provide adequate speed for daily usage,” say the analysts.
“Nevertheless, StarHub believes the opportunities for 5G would come from bundling mobile plans with services beyond connectivity, such as gaming and VR/augmented reality services. The proliferation of affordable 5G handsets will pave the way for a successful 5G adoption,” they add.
Earnings accretion from 5G will also take time due to the heavier system integration, although Chong and Tan believe that opportunities of 5G investment may rely heavily on enterprise business solutions.
StarHub’s synergy from its joint venture with M1 will also help the telco ease its 5G capex burden. Chong and Tan gather that the capex for StarHub alone is estimated at $200 million over five years starting 2H20, as the nationwide 5G network will roll out commercially by January 2021.
“The estimated $200 million capex will include StarHub’s own budget for optimising its 5G core network as well as its 50% capex proportion to Starhub-M1 joint venture. We estimate the capex intensity for StarHub at 11-13% for 2020-21 even as capex is guided to be frontloaded for the first two years. This is lower vs the 14-15% during the transition of 4G investment,” they say.
As at 4.49pm, shares in StarHub were trading flat at $1.18.
