Hold the call on StarHub as DARE+ starts to bear some fruit

Analysts are keeping "hold" on StarHub as they await the group to reap the benefits from its DARE+ initiative.

Following local telco player StarHub’s CC3 latest 1HFY2023 ended June results, analysts are keeping “hold” on the stock as they wait to see its business transformation bear fruit.

During the 1HFY2023 period, the group reported a 25.8% y-o-y increase in net profit attributable to shareholders of $76.7 million, lifted mainly by higher contributions across all business segments.

Service revenue grew 7.8% y-o-y to $938.1 million during the half-year period, says StarHub on Aug 3, lifted by a 12.8% revenue growth in its mobile segment, 7.6% for its broadband segment, 18.2% for its entertainment segment and 1.8% for its enterprise segment.

The group has declared an interim dividend of 2.5 cents for 1HFY2023, while reiterating its dividend guidance of at least 5.0 cents per share in FY2023.

StarHub’s total revenue of $1,106.1 million for 1HFY2023 was 4.5% higher y-o-y, while its operating expenses grew 3.5% y-o-y to $1,000.7 million over the same period.

Already, CGS-CIMB Research has kept its “hold” call and $1.15 target price, as it anticipates that it will take more time for the telco to reap the fruits of its transformative efforts.

Maybank Securities is also keeping its “hold” recommendation, but with a lower target price of $1.08 from $1.10 previously, despite Ebitda of $117 million and Patmi of $38 million exceeded expectations.

“We tweak our FY2023/FY2024 earnings forecasts by -3.8%/-3.1%, as guided, delayed in project recognition for D’Crypt and JOS SG would likely dent service revenue for FY2023 affecting profitability. We also think that bulk of investment in the 2HFY2023 could drag service Ebitda margin lower to 19%,” says analyst Kelvin Tan in his Aug 4 report.

Aside from the revenue improvement across all segments, Tan notes that postpaid average revenue per user (ARPU) rose 10% y-o-y on higher roaming and value-added services (VAS) revenue due to travel recovery. Contributions from consolidation of MyRepublic’s broadband business in Singapore and Premier League subscriptions lifted revenue from Broadband (+7.6% y-o-y) and Entertainment (+18.2% y-o-y) in 1H2023, respectively. “We foresee further earnings and cost synergies in FY2023 and beyond,” says Tan.

On the other hand, Tan is cautious on Ebitda margin being at risk from investment.

“We estimate FY2023 service Ebitda margin could narrow further to 19%, despite efforts to realise operational efficiencies from DARE+ through lowering staff cost and professional fees,” he says.

StarHub will likely face higher marketing costs, as it looks to fuel adoption of its new Infinity Play platform with more services to retain users and over-the-top content to attract mobile and broadband users, and additional spending as it rolls out enterprise solutions.

However, the way Tan sees it, ample free cash flow should be sufficient to achieve its dividend guidance of 5 cents this year. He estimates a low average at FY2023 net debt/Ebitda of 2.6x, as compared to 2.9x in FY2022, which also leaves room to raise debt to finance its dividend payout.

“In our view, StarHub may need to look past FY2023 for a significant profit pay-off from its DARE+ initiative, encapsulating its IT and digital transformation, given the bulk of its committed capex and opex is slated for 2HFY2023, blunting help from resilient revenue,” says Tan who has estimated potential double-digit mobile gains and a healthy enterprise project order book to lift service revenue about 10%.

Tan also expects Ebitda for FY2024 to return to about $500 million, similar to the pre-DARE+ period in FY2021, on easing costs and reaping benefits from DARE+ investments.

As at 3.45pm, shares in StarHub are trading at 0.93% higher at $1.09.

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