CGS-CIMB raises EPS estimates as StarHub’s 1HFY2023 surpasses expectations

The brokerage retained its ‘hold’ call as StarHub may take time to reap fruits of its transformative efforts: CGS-CIMB

Although StarHub’s 1HFY2023 ended in June results were above expectations, CGS-CIMB Research analysts have reiterated their “hold” call at an unchanged target price of $1.15, in anticipation that it will take time for the telco to reap the fruits of its transformative efforts.

“We expect earnings growth to remain weighted by the ramp-up in transformation costs,” write analysts Kenneth Tan and Lim Siew Khee.

StarHub reported a net profit of $76.7 million, forming 71% of CGS-CIMB’s full-year forecast. Its revenue of $938.1 million was a “slight miss”, but ebitda was in line at $230 million due to cost rationalisation efforts, Tan and Lim note.

Service ebitda margin remained healthy at 22.7%, an increase of 6.4% percentage points (ppts) h-o-h, tracking ahead of the group’s initial FY2023 guidance of about 20%, they add.

Mobile revenue, driven by stable postpaid average revenue per user (ARPU) and continued subscription growth, was in line with the analysts’ expectations, but cybersecurity reported an operating loss of $8.9 million (compared to the $0.5 million profit in the 1HFY2022), on the back of higher staff and research and development (R&D) expenses.

The analysts note that StarHub’s management has raised its FY2023 service ebitda margin guidance to about 22%, from 20% previously, in view of two factors. Its Dare+ initiatives has realised more operational efficiencies than thought, and the lesser-than-expected contribution from lower-margin businesses D’Crypt and JOS Singapore.

“The group also now expects to incur lower Dare+ transformation costs in FY2023 of $120 million (from $155 million previously) due largely to cost rationalisation; StarHub has incurred $30 million year-to-date, indicating costs to be back loaded into 2HFY2023 and possibly into FY2024, in our view,” say Tan and Lim.

With this, the analysts expect StarHub’s 2HFY2023 core net profit to trend sequentially lower to $41 million, a decline of 47% h-o-h.

In addition, Tan and Lim say that StarHub has lowered its FY2023 revenue growth guidance to 3%-5%, from 8%-10% previously, in view of material project delays for D’Crypt and ongoing rationalisation of JOS Singapore’s order pipeline towards higher-margin projects.

“While we see a positive outlook for its other enterprise businesses (Ensign, JOS Malaysia, Strateq), we expect near-term slowdown for D’Crypt and JOS Singapore as the group works through their transient issues,” they say. “Back-end loaded delivery of projects should support h-o-h segment revenue growth in 2HFY2023, in our view.”

With these new assumptions, Tan and Lim have raised their FY2023-FY2025 earnings per share by 6%-9%.

“Upside risks include lower Dare+ costs, faster reaping of transformative efficiencies, and mobile market consolidation. Downside risks include stiffer competition, and cost overruns,” they write.

As at 1.13pm, shares in StarHub are trading 3 cents higher, of 2.86% up at $1.08.

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