SINGAPORE (Nov 6): Analysts from two research houses – DBS Group Research and CGS-CIMB Research – are upgrading StarHub to “buy”, from “hold” previously, following the telco’s 3Q results announcement.
The optimism comes on the back of views that StarHub’s earnings pressures have already been priced in, while its enterprise and wireless segments could provide potential catalysts for the counter.
Year to date, shares in StarHub had slid nearly 24% to close at $1.32 on Nov 5, before the release of its results.
For the latest 3Q19 ended September, StarHub saw its earnings rise slightly by 1.7% to $58.0 million, even as revenue dipped 1.6% to $572.6 million on lower contribution from its Mobile, Pay TV and Broadband businesses.
See: StarHub reports 1.7% rise in 3Q earnings to $58 mil despite revenue dip
DBS analyst Sachin Mittal notes that despite weak operating metrics, StarHub’s share price could benefit from significant capital expenditure reduction over 2019 and 2020.
A potential joint bid for a 5G license could also be a potential catalyst for the stock, he adds.
“A joint bid with another major telecom operator for the nationwide 5G licence in Jan 2020 could rekindle interest in the stock,” says Mittal in a Nov 6 report. He has upgraded to a “buy” call and a higher target price of $1.43.
Another new optimist in StarHub is CGS-CIMB analyst Foong Choong Chen, who has changed his call to “buy” with a target price of $1.65.
Foong notes that the recent 3Q19 results has beat expectations, on the back of higher handset profits and the adoption of the new SFRS 16 accounting standard.
Foong also highlights the resilience of the mobile segment, with revenue only falling 1.2% q-o-q to $190 million.
While Pay TV and Broadband revenues saw bigger slides, Foong notes that StarHub has guided for revenues to stablise from 1Q20, with subscribers locked in two-year contracts.
Factoring in the 5G spectrum and network rollout capex, Foong believes that StarHub’s management is executing opex and capex savings initiatives well.
“This should help to buffer against adverse revenue effects from TPG’s entry, which should give investors greater confidence on earnings delivery and act as a re-rating catalyst,” says Foong in a Nov 6 report.
Luis Hilado, an analyst at Maybank Kim Eng Research, also remains bullish on StarHub. He is maintaining a “buy” call with a target price of $2.00.
Hilado believes that StarHub’s cashflows offer deep value at current share price levels. According to Hilado, the recent results have also shown the continued but expected pressure, with impact on Pay TV and Broadband revenues.
While wireless services revenue was down q-o-q, Hilado notes that the combined wireless revenue segments grew 8% q-o-q, which potentially reflects successful retention efforts. “However, management remains cautious on the competitive environment given there appears to be more [Mobile Virtual Network Operators] lining up to join the currently 12-brand market,” he says in a Nov 6 report.
On the other hand, OCBC Investment Research’s research team has a more tempered view of StarHub, with a “hold” call and a fair value of $1.42.
OCBC notes that the telco continues to face significant pressures with increased competition in the telecom industry, notably in the consumer mobile space with TPG’s impending commercial rollout and MVNOs pressure.
The improving traction of StarHub’s enterprise fixed business and ICT capabilities are unlikely to be enough to offset the weaknesses in other areas as well, it adds.
StarHub has taken steps in spending less on business lines with less growth aspects and rationalising capex to conserve reserves for 5G. StarHub has achieved 60% of the $210 million gross savings by 2021, a good portion of which OCBC believes will be for reinvestment.
The group is currently in discussions with other MNOs to explore potential partnerships to bid for one of the two nationwide 5G networks. Management has continued to signal that competition within the mobile service still remains intense, while its Pay TV segment would probably only achieve revenue stability from 1Q20 onwards,” says OCBC in a Nov 6 report.
As at 2.57pm, shares in StarHub are trading 13 cents higher, or up 9.9%, at $1.45.
