Local telco StarHub recorded a set of lacklustre 3QFY2022 ended September results, with earnings coming in 32% lower y-o-y at $27.4 million, despite revenue coming in 14.2% higher y-o-y at $590.8 million.
Analysts have mixed sentiments on the stock. The bullish Maybank Securities and PhillipCapital have kept their "buy" and "accumulate" calls, with Maybank increasing its target price of $1.33 from $1.32 previously and PhillipCapital dropping its target price to $1.15 from $1.35 previously.
Meanwhile, RHB Group Research maintains its “neutral” call and lowered target price to $1.07 from $1.20 previously, and DBS Group Research is keeping its “hold” rating with a lowered target price of $1.02 from $1.31 previously.
For the more upbeat Maybank, analyst Kelvin Tan says that 9MFY2022 Ebitda of $339.2 million and Patmi of $88.3 million came in within expectations at 75% and 76% of FY2022 estimates.
However, the Patmi’s 18% y-o-y drop was underwhelming, as the decline was because of on-off expenses for premier league and ongoing DARE+ investments.
A lofty IT transformation outlay, mostly treated as opex to fuel its multi-year DARE+ program, will likely lead to a drop in Ebitda margin to 20.4% in FY2022 from 23.2% in 3QFY2022 as costs are expected to rise in 4QFY2022.
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“We are also cautious that further delays in capex spending into FY2023 might also drag on net profit through higher depreciation costs. Unless roaming revenue gains momentum or fresh revenue begins to contribute meaningfully, we think earnings will be sluggish in 2HFY2022,” says Tan.
Enterprise sales momentum, which increased by 16.7% y-o-y, continued to surge due to contribution from JOS Malaysia and Singapore and on a wider base after consolidating MyRepublic.
“We raise our FY2023/FY2024 bottomline forecasts by 6.7%/5.4% to reflect the positive contribution from its newly integrated businesses,” says Tan.
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Overall, Tan acknowledges that FY2022 will be a transition year for StarHub to undertake the necessary investments into new growth areas under DARE+. However, amid price rivalry and inflation, he believes that Starhub is well-placed to capture the roaming recovery and opportunities when China’s economy eventually reopens. “We believe it is on track to beat its own guidance and to continue to offer a 4% sustainable annualised dividend yield,” he adds.
For PhillipCapital, analyst Paul Chew's expectations of the group's 9MFY2022 revenue and ebitda were in line with expectations at 77% and 83% of FY2022 estimates, respectively.
However, Chew notes that StarHub's guidance for FY2022 is bleak, as ebitda margins are expected to collapse to 14% from 23% in 9MFY2022 and write-offs are expected from Strateq healthcare business and legacy IT systems.
Nonetheless, mobile revenues have recovered strongly thanks to growth in both post-paid prices and subscribers. But ebitda suffered due to a surge in operating expenses from preannounced investments into new growth areas under the DARE+ transformation. Such cost include English Premier League (EPL) content and IT.
Similarly, the RHB Singapore research team expects FY2022 earnings to decline by 21% y-o-y, due to higher DARE+ opex and capex, followed by a 19% rebound for FY2023 bottomline. This is as the roaming revenue recovery gathers pace alongside some positive synergies from the transformation programme.
During 3QFY2022, core profit after tac fell 12.2% q-o-q or 31.5% y-o-y on lower Ebitda and margin from the ramp-up in opex related to StarHub’s five-year (2022-2026) DARE+ transformation programme. This brought 9Mfy2022 core earnings to $88.3 million, at 76% of RHB’s forecast or 80% of consensus’ forecast. Overall, service revenue grew 13% in 9MFY2022, with enterprise and broadband posting the strongest gains, followed by entertainment and mobile.
StarHub has recalibrated its guidance based on the latest run-rate, with full-year service revenue growth of “12-15%” from “at least 10%” on expectations of further roaming recovery. Meanwhile, capex guidance has been moderated to “9-12%” from “12-15%” of revenue, as some investments have been deferred to FY2023.
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Meanwhile, StarHub saw a strong recovery in mobile revenue, posting its third consecutive quarter of y-o-y growth, mainly from stronger recovery in roaming and prepaid sales. Entertainment revenue jumped 12.6% q-o-q, as average revenue per user (ARPU) surged 13% q-o-q from subscriptions to the EPL, which were booked from August.
Broadband revenue expanded 23.5% y-o-y in 9MFY22, with the second quarter of contributions from MyRepublic (MR) broadband. It fell marginally q-o-q from stronger competition.
The research team however has dropped its target price to factor in a higher risk-free rate assumption from the heightened inflationary environment.
DBS Group Research on the other hand expects earnings recovery to be delayed from FY2023 to FY2024, as a higher portion of StarHub’s DARE+ transformation Opex was pushed from FY2022 into FY2023.
In addition, content cost would also rise sharply as FY2023/FY2023 and would see full-year cost of English Premier League (EPL) rights, compared to only five-months in FY2022. This, according to DBS analyst Sachin Mittal, would largely offset the recovery in mobile and enterprise revenue in FY2023.
StarHub has committed to a minimum dividend per share (DPS) of 5 cents or 80% of its net profit, whichever is higher in FY2022 and FY2023. According to Mittal, this implies a decent 5% yield, while waiting for recovery.
While Mittal has dropped target price to $1.02 to factor in lower FY2023 and FY2024 earnings, as well as higher risk-free rate, he has introduced a bull-case valuation of $1.20 – which may materialise if there is industry consolidation over the next six months, leading to FY2022-FY2024 earnings CAGR of 12% – and a bear-case valuation of 90 cents – which may materialise if FY2023 earnings declines by about 5%.
As at 2.25pm, shares in StarHub are trading 1.9% higher at $1.05.
