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Analysts remain upbeat on StarHub on transitional 2023; UOB Kay Hian upgrades stock to 'buy'

In her report, UOB Kay Hian’s Chong Lee Len adds that consolidation in the market is a ‘key re-rating’ catalyst for the stock.

Analysts are remaining upbeat on StarHub on the back of the telco’s DARE+ transformation programme.

After attending its investor briefing, UOB Kay Hian analyst Chong Lee Len issued an upgrade on StarHub to “buy” from “hold” with an unchanged share price of $1.30.

The upgrade comes on the back of a “hefty correction” in StarHub’s share price year-to-date (ytd), which is around 23.53% lower, at $1.05 as at Chong’s report on Dec 9.

“We believe the risk-reward for the stock is compelling,” she writes. “Firstly, valuation is attractive as the stock trades at -2 standard deviations (s.d.) from its mean EV/ebitda of 7x. Secondly, as Starhub embarks on its DARE+ journey, we expect earnings to gradually recover from a low base in FY2022.”

In the FY2023, the analyst is estimating StarHub’s net profit to grow by 18% y-o-y to $133 million, which is still below StarHub’s pre-Covid-19 profit of $178 million in FY2019.

“We also believe the market is ready for consolidation as the regulator is open to the suggestion. We note that market consolidation is good for incumbents, with significant cost synergies a key reason to consolidate among peers,” she adds.

Under its DARE+ initiative, the analyst notes that StarHub is expected to deliver $500 million in cost savings over the FY2022 to FY2026.

“This entails spending $310 million to drive [an] incremental net profit stack of $80 million from FY2026 onwards – suggesting a robust three-year earnings compound annual growth rate (CAGR) of 15% over FY2023 – FY2026,” says Chong.

“With the bulk of investments to be spent in FY2023, we expect Starhub to reap revenue growth opportunities from FY2024 onwards,” she adds.

Based on Chong’s estimates, StarHub offers a “sustainable dividend yield” of 4% for the FY2022 to FY2023.

In her view, another key re-rating catalyst for the stock – beyond the consolidation of the market --  is the return of tourists to Singapore, which will prop its prepaid SIM card sales up, as well as the faster-than-expected 5G adoption and new business cases in Singapore.

PhillipCapital analyst Paul Chew has kept his “accumulate” recommendation on StarHub with an unchanged target price of $1.15.

Chew’s target price is pegged at 7x of StarHub’s FY2022 EV/ebitda, in line with the rest of its mobile peers.

To Chew, he sees FY2023 as “another transition year” for the telco with “lumpy capital expenditure and operating costs to be incurred”.

“The financial impact can be watered down from a recovery in the high margin roaming revenue as borders re-open. Key roaming destinations for StarHub are Malaysia and China,” he says.

As at 2.36pm, shares in StarHub are trading flat at $1.05.

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