SINGAPORE (Apr 3): StarHub, which is facing stiff competition and disruption in its consumer business, has made yet another big move to beef up its enterprise business, which has quickly become its second largest revenue segment following a series of acquisitions and recent years of organic growth.
On March 11, the company announced that it is acquiring 88.3% of Strateq, a Malaysia-based IT company, for $82.1 million. This acquisition marks both a significant expansion into a new market, Malaysia, as well as into a newer range of capabilities.
As the company grapples with its stagnant existing core mobile, broadband and pay TV businesses, additional acquisitions to step up the growth of its enterprise business are likely. “We are diversifying into adjacent segments, we are diversifying into new geographies. That’s got risks, and that’s got rewards,” says StarHub CEO Peter Kaliaropoulos, in an interview with The Edge Singapore.
Established in 1988, Strateq has customers mainly in Malaysia, but also in other markets such as Thailand, Hong Kong and Singapore. With its long operating history, it has managed to build up ties with many key customers such as those in healthcare and the oil and gas industries. These customers tend to sign multi-year contracts with the company, which gives it a strong recurring revenue stream. Strateq has an interesting market niche: providing IT systems for around 4,000 petrol stations across the region. For FY2019, Strateq reported earnings of just over $5.9 million, which implies StarHub is paying for this acquisition at around 20.4 times Strateq’s earnings.
On its own, Strateq is likely to contribute $1.9 million to StarHub’s bottomline per year, after taking into account financing costs, estimates CGS-CIMB analysts Foong Choong Chen and Sherman Lam. This amount might not be huge, but part of the plan is for Strateq to complement the existing enterprise and cybersecurity businesses that StarHub already has. “We believe there are revenue synergies, as Strateq and StarHub can cross-sell each other’s products and services to their existing client base,” state the CGS-CIMB analysts, who gave a target price of $1.80, in their March 12 note.
Besides StarHub’s own enterprise division that provides networking and data hosting services to large customers, StarHub owns a stake in cybersecurity firm Ensign InfoSecurity, which is a joint venture with Temasek Holdings, StarHub’s own controlling shareholder. In addition, StarHub has a 60% economic interest in D’Crypt, which is described to be a specialist in cryptography.
These various companies, including StarHub’s own enterprise unit, are already working together to complement each other. For example, Ensign and StarHub are jointly offering a form of pre-emptive DDOS service, says Charlie Chan, head of StarHub’s enterprise business, at the same interview, and that he will be actively looking at more ways these different entities can work better together.
However, there are no plans for a tighter, more uniform branding. In fact, they will keep their distinct identities, and be encouraged to grow as quickly as they can individually, even as they collaborate with other related organisations, says Kaliaropoulos.
For example, Strateq, with its more than three decades of operating history, enjoys a much better name recognition in its home market of Malaysia. Current Strateq group managing director Tan Seng Kit, upon completion of the acquisition, will continue in this role and, with him holding the remaining 11.7% of Strateq, he has skin in the game to grow the company to the best he can.
Anorexic company
Kaliaropoulos, who has a track record of making acquisitions and restructuring companies, rejoined StarHub around two years ago. His mandate is to lead the company’s transformation and arrest the earnings decline caused by disruptions to the pay TV business, and further exacerbated by limited growth in the mobile and broadband segment due to stiff competition from new entrants.
As Kaliaropoulos embarked on the turnaround plan, he put forward two options. “One is to downsize and stay in Singapore, play that game, which is not very smart and before you know it, you are running an anorexic company. You cannot shrink to greatness,” he says.
Thus, the other option, the one StarHub has chosen, is to acquire new businesses and so that it can accelerate the growth and make up for the declining earnings. Under Chan, the enterprise unit head, StarHub has been scouring the market and parsing out which specific segments that will give some “runway” to win some market share using what StarHub has. However, that alone will not be enough and, therefore, acquisitions such as Strateq are happening — and, very likely, will not be the last as StarHub hunts for new, significant growth.
The returns from acquisitions are not always immediate. For example, StarHub is investing aggressively in its cybersecurity business: hiring new people, developing new markets. While revenue for the cybersecurity business increased by 79.1% y-o-y to $145.7 million for FY2019, expenses surged by 108.9% y-o-y in the same period to $169.4 million. This means the cyber-security business was still in the red for the year.
Cost savings
For 4QFY2019, StarHub, as a whole, saw its revenue dip slightly by 1.8% to $608.4 million. However, earnings increased by 75.4% y-o-y to $34.9 million in the same period, thanks to lower costs. For the full year, the company reported earnings of $186.3 million, down 7.5%, on the back of 1.3% drop in revenue to $2.3 billion.
As part of the company’s three-year-long transformation programme that began in late 2018, StarHub is aiming for cost savings of $210 million. It has managed to identify and achieve around two thirds of that already. Besides cutting jobs, some of the savings came from changing the way StarHub pays content providers for its pay TV business, which remains a drag, as more subscribers switch over to alternatives such as Netflix and pirated boxes.
For FY2019, pay TV revenue dropped by 20.3% for the year to $248 million. A big reason behind this drop was because StarHub had to migrate its pay TV subscriber base from the old cable system to the new fibre network-based system. During the year, 80,000 households gave up on StarHub’s pay TV, leaving it with 329,000 customers in this segment.
The key way StarHub has dealt with lower revenue from pay TV is to tackle its cost structure. Instead of paying the content providers a fixed fee, StarHub has actively negotiated for a variable cost structure pegged partly to the viewership of the individual channels. “If you don’t do a variable deal with us, go to the market directly. The consumer will pay you subscription by subscription. That is the new reality. So, don’t come to us and ask for a fixed amount of money,” explains Kaliaropoulos. Some content providers, such as the NBA, initially parted ways with StarHub, but eventually came back.
Meanwhile, the largest business segment remains mobile, which contributed revenue of $765.5 million for FY2019, 7.2% down from the previous year. Competition, already stiff, is set to remain even so. On March 31, the fourth, and newest operator, TPG, announced new price plans that undercuts that offered by the market incumbents (see “TPG launches ‘best-value’ commercial mobile plan”).
In a few months’ time, the Singapore mobile industry will reach another milestone, as the government will announce winners of the 5G license, heralding a new era of much faster network speeds, carrying much bigger amounts of data traffic, and opening up new ways of using mobile networks beyond just people calling, texting one another.
However, the licenses, and the 5G networks, will not come cheap. Investors were earlier worried that StarHub, already forced to cut its dividends from the peak of 20 cents per share a year to just nine cents, will struggle to even maintain this current level of payout.
There was some sigh of relief when StarHub and M1 said on Feb 17 that they are jointly bidding for a 5G spectrum license. The base price of the bid is $55 million. If this bid is successful, both telcos will be able to enjoy substantial savings in capital expenditure. Instead of each building its own network, the joint bid means the two companies will share the same infrastructure.
DBS analyst Sachin Mittal estimates if StarHub were to build its own 5G network, it will cost $450 million a year. By sharing the network with M1, this number can be brought down to between $250 million and $280 million. The company now generates operating cash flow of between $400 million and $450 million a year, and given this joint network arrangement, StarHub will be able to maintain its nine cents per share dividend, says Mittal, who on March 26 kept his “buy” call but with a reduced target price of $1.40 from $1.72.
