Analysts have all kept their “hold” or “neutral” calls on StarHub with raised target prices after the telco reported its results for the FY2022 ended Dec 31, 2022, on Feb 7. Maybank Securities and PhillipCapital have both downgraded their calls to “hold” with a lower target price estimate. UOB Kay Hian is the most optimistic with its "buy" call with a raised target price.
StarHub had reported earnings of $62.2 million for the FY2022, which fell by 58.3% y-o-y. Its earnings for the 2HFY2022 plunged by 98.4% y-o-y to $1.3 million due to higher operating and non-operating expenses.
With the exception of RHB Group Research and PhillipCapital, which considered StarHub’s full-year results as “broadly in line” with provisions related to its transformation programme, the rest of the analysts noted that the telco’s FY2022 results missed their expectations.
Look beyond bottom line, says Citi Research
Citi Research analyst Arthur Pineda, in particular, noted that the telco fell “far short” of the street’s full-year estimates. However, he added that the missed expectations were due to StarHub’s transformation related expenses in the 4QFY2022.
While the bottom line came in as a “shock”, Pineda is advising investors to look beyond the figures. “Consensus does not provide a good benchmark owing to the timing of its transformation-related cost bookings. StarHub booked [around] $ 31 million restructuring provisions and [around] $75 million in transition related investments and operating expenses (opex),” Pineda notes.
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“Even with the reported profit softness, its 5-cent dividend guidance was met, allowing for a 5% yield,” he adds.
In spite of the transformation-related costs, Pineda noted StarHub’s “healthy” revenue gains even as inorganic factors are removed.
“Excluding transformation related one-off costs, recurring net profit after tax (NPAT) declined -24% y-o-y to $114 million, which is in-line with street estimates for the year,” he writes.
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In addition, Pineda notes that the telco saw growth return to all its businesses.
“All major service lines saw growth revival with mobile (+8% y-o-y for FY2022) with rising average revenues per user (ARPUs) and subs. Broadband (+6% y-o-y organic, +25% including acquisitions) saw expansion given MyRepublic broadband contributions and subscriber upselling,” he says.
“Entertainment (+16% y-o-y) also saw expansion with the benefit of enhanced ARPU boosted by Premiere League and World Cup content. Enterprise saw a +4% organic growth with networking, information and communications technology (ICT) service and cybersecurity all posting expansion,” he adds.
Pineda has raised his target price to $1.10 from $1 previously. However, the analyst lowered his NPAT estimates for the FY2023 to FY2024 by 13% to 15% to factor in any spillover transformation costs.
“Given these fluid expense bookings in FY2023-FY2024, we believe investors will not find confidence in StarHub’s near-term earnings, rendering relative value as difficult to predict. Commitment to 5-cent minimum dividend however allows for downside protection,” he says.
Pineda’s new target price reflects a target yield of 5%.
DBS sees assured 4.5% yield despite earnings cut
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DBS Group Research analyst Sachin Mittal has increased his target price on StarHub to $1.05 from $1.02.
“Our discounted cashflow (DCF) valuation is revised to $1.05 due to upward revision in our FY2023/FY2024 earnings due to a sharp drop in transformation opex,” he says. “We use a weighted average cost of capital (WACC) of 8.3% (previously 8.2%) and terminal growth rate of 0% in our DCF valuation.”
In his report dated Feb 8, Mittal sees StarHub’s earnings recovery as likely to be delayed to FY2024. He adds that while StarHub’s guidance for the FY2023 is in line with his estimates, the consensus is likely to cut its earnings estimates for the FY2023 by 18% to 20%. This is due to the higher transformation opex of $60 million to $70 million in FY2023 versus the $31 million in FY2022 as well as the transformation capex of $140 million to $150 million in FY2023.
“In addition, FY2023 would recognize the full-year cost of English Premier League (EPL) rights,” notes the analyst.
Despite the cut in the street’s earnings, Mittal notes that StarHub’s commitment to a minimum dividend of 5 cents per share or 80% of its net profit – whichever is higher – means the stock offers investors an “assured” yield of 4.5%. The analyst has assumed a dividend estimate of 5 cents for the FY2023 and 5.7 cents for the FY2024. That said, Mittal notes that there may a “dent” in the stock’s performance should the telco decide to lower its dividend.
CGS sees StarHub’s core EPS to remain ‘depressed’ in FY2023
CGS-CIMB Research analyst Foong Choong Chen and Sherman Lam have also upped their target price estimate to $1.15 from $1.10.
This is despite StarHub’s core earnings per share (EPS) for the FY2022 missing their full-year forecast by 25% due to higher-than-expected costs.
On this, the analysts have cut their core EPS estimates for the FY2023 and FY2024 by 17% and 18% respectively after factoring in higher DARE+ investments of $310 million from $270 million previously.
The estimates cut also factors in two quarters’ delay in completing the DARE+ transformation programme, as well as the start of 700MHz amortisation in January 2024 as opposed to January this year.
“From FY2022’s low base, we see core EPS staying depressed, up only 6.8%/3.8% y-o-y in FY2023/FY2024 (held back by DARE+ costs). It should then climb a stronger 24.7% y-o-y in FY2025 on continued enterprise growth and start of DARE+ benefits,” write Foong and Lam.
“Despite our earnings cut, StarHub’s target price is raised by 5% after lowering the longer-term capex to be more in line with its FY2023 business-as-usual capex guidance,” they add. “Given the weak FY2023 earnings outlook, we think its share price will stay rangebound.”
RHB says StarHub is still a ‘work in progress’
The research team at RHB Group Research says StarHub is still a "work in progress", saying its overall recovery in revenue momentum is “expected” following a low base in the FY2021 during the height of the Covid-19 pandemic.
Unlike its peers, the team saw the telco’s results as being in line with its expectations.
However, it has lowered its core earnings estimates for the FY2023 to FY2024 by 8% to 9% to factor in higher capex which was deferred from FY2022 as well as additional investments for cloud transformation.
The RHB team has upped its target price to $1.11 from $1.07, which incorporates a 2% environmental, social and governance (ESG) premium. The new target price is now based on rolled-over valuations to FY2023’s figures.
Within the telco sector, the RHB team has indicated its preference for Singapore Telecommunications (Singtel) for “exposure”.
Maybank downgrades StarHub due to missed expectations, higher cost pressures in FY2023
Maybank Securities analyst Kelvin Tan has lowered his target price to $1.15 from $1.33 in addition to his downgrade.
StarHub’s patmi for the FY2022 missed his expectations at 79% of his full-year estimates, and was deemed “underwhelming” due to the one-off provision relating to StarHub’s DARE+ initiative.
Like his peers at CGS-CIMB, Tan also anticipates StarHub to see its earnings recovery delayed to FY2024 due to the higher transformation opex pushed for DARE+ in FY2023.
“As such, we reduced our FY2023/FY2024 bottomline forecasts by -6%/-2% to reflect lumpy capital expenditure and operating costs to be incurred,” he writes.
“Our target price for Starhub falls 13% to $1.15 from $1.33, downgrading to ‘hold’ as we believe ebitda would return to the FY2021 baseline by FY2024,” he adds.
However, the analyst sees the consolidation of the market as a key catalyst for the telco.
“We think Starhub is well-placed to look for mergers and acquisitions (M&A) opportunities to accelerate growth and create new revenue streams in the diluted Enterprise segment. Its FY2022 balance sheet remained healthy with free cash flow (FCF) of $223 million and net debt to ebitda of 1.38x,” he says.
Dividend yield unattractive: PhillipCapital
PhillipCapital analyst Paul Chew has also lowered his target price to $1.08 from $1.15 in addition to his downgrade as he sees "another year of heavy investments".
While StarHub's revenue and ebitda came in line with his expectations at 101% and 102% of his full-year estimates, Chew is less keen on the telco's higher operating expenses, which outpaced revenue in the 4QFY2022. During the quarter, StarHub saw its mobile revenue grow by 13% y-o-y to $153.1 million, showing a rate not seen since FY2005. Yet, the quarter also saw operating expenses jump by 35% y-o-y to $667 million.
"Excluding the $30.8 million non-current, the rise will still be high at 29% y-o-y. Types of cost that outpaced revenue were repairs and maintenance, marketing and Pay TV content cost," he writes.
The drop in dividends is also another negative in Chew's view. StarHub's dividend for the FY2022 was down by 22% y-o-y to 5 cents. The telco's dividend guidance for FY2023 remains unchanged with a payout of at least 5 cents.
"With capex to sales ratio expected to double from 7.3% in FY2022 to between 13%-15% in FY2023, there is little upside in dividends," Chew writes, adding that the dividend yield is "unattractive" considering that investors have to weather another year of weak earnings.
To this end, Chew sees another year of "lacklustre results" for the FY2023.
"The higher capital expenditure and operating expenses from DARE+ restructuring we estimate will be $180 million, more than double the $75 million spent in FY2022," he says.
"Higher costs will wear down earnings and balance sheet. Capital expenditure in FY2023 is expected double from $160 million to $329 million," he adds.
StarHub to set stage for transformation: UOB Kay Hian
UOB Kay Hian analysts Chong Lee Len and Llelleythan Tan see StarHub as setting the stage for its transformation with their "buy" call. The analysts have raised their target price to $1.35 from $1.30 previously.
"StarHub is expected to incur most of its transformative investments in FY2023 and will begin reaping the rewards from FY2024 onwards," the analysts write.
To Chong and Tan, StarHub's FY2022 results were "mixed" with revenue growth but a decline in patmi during the year.
Referring to the telco's guidance for FY2023, the analysts see its margins to remain stable despite their peaking investments.
"Although StarHub is expected to incur an estimated $200 million in investments in 2023, management has guided that 2023 service ebitda margins are expected to remain stable y-o-y at 20% as cost savings from DARE+ investments would help to offset the upcoming investment costs. Capex commitment has increased slightly to 13%-15% given that there was a delay in FY2022," they write.
"With the bulk of investments to be spent in FY2023, we expect StarHub to reap revenue growth opportunities from FY2024 onwards," they add.
StarHub's dividend guidance of at least 5 cents a share amounts to a yield of around 4.5%, based on UOB Kay Hian's estimates.
In their report dated Feb 8, Chong and Tan have cut their FY2023 patmi by 8% to account for more investments while increasing their FY2024 patmi estimate by 5% to account for cost savings from StarHub's DARE+ initiatives.
"At our fair value, the stock will trade at 6x FY2023 EV/ebitda, 1 standard deviation (s.d.) below its five-year mean EV/ebitda of 7.5x," they note.
Shares in StarHub closed 7 cents lower or 6.31% down at $1.04 on Feb 8.
