StarHub recently announced its 1QFY2024 ended March business update. For the first quarter, normalised earnings (excluding D’crypt that was divested in February) were 8.1% higher y-o-y at $40.1 million, while revenue held steady at $545.4 million, down 0.1% y-o-y.
Service revenue, which excludes items such as the sale of equipment, increased by 1.9% y-o-y to $458.9 million, which is in line with its FY2024 guidance of growing between 1% and 3%.
Mobile revenue, its single largest business segment, saw a 4.6% y-o-y drop in revenue to $145.2 million, no thanks to lower average revenue per user. This was a result of users movement to SIM only plans and lower excess usage revenue. The group seeks to address this issue by promoting handset-bundling plans along with new services.
Its enterprise segment recorded a 10.4% jump in revenue to $197.7 million, thanks partly to higher revenue from cybersecurity services and network revenue.
See more: StarHub's 1QFY2024 earnings up 8.1% y-o-y
Following which, analysts have been rather positive and keeping their “buy” recommendations on the telco player.
DBS Group Research has maintained its “buy” call and $1.54 target price, on 8% earnings CAGR over FY2023-FY2025, coupled with 5.8% dividend yield.
StarHub had earlier guided transformation cost of $54 million (20% of $270 million) to be incurred in FY2024 and the remaining $27 million in FY2025, with capex/opex split of 60%/40%. This has been revised, where it expects about $100 million of transformation cost in FY2024 with no residual in FY2025.
Furthermore, there has been a change in the capex/opex split, to 55%/45% from 60%/40% earlier. Due to this, DBS believes that the FY2024 earnings could be adversely impacted by $15 million. However, StarHub maintains its FY2024 service EBITDA margin and capex guidance on cost efficiencies.
See also: RHB still upbeat on ST Engineering but trims target price by 2.3%
Meanwhile, UOB Kay Hian too continues to rate StarHub “buy” with the same target price of $1.41.
Analysts Chong Lee Len and Llelleythan Tan views StarHub’s 1QFY2024 results as in-line estimates, as it also met most of its own FY2024 guidance, while exceeding its capex guidance.
“Moving into 2QFY2024, we expect some downside to service revenue growth given stiff competition in the group’s consumer segments, likely meeting the lower end of its guidance. Also, service EBITDA margin is expected to stay muted as capex commitment would likely increase from increased frontloaded DARE+ investments, offset by realisation of DARE+ cost efficiencies,” say the analysts. They have estimated a dividend of about 7.9 cents, implying an 80% Patmi payout and 6.3% yield.
On the outlook, Chong and Tan expect mobile competition to remain intense amid the group’s soft performance, while entertainment is affected by seasonality due to the cessation of promotions and absence of one-off revenue contributions from the Cricket World Cup.
As for broadband, the group remains quite stable in this segment despite stiff competition, supported by new customer acquisitions and ongoing migration to the ARPU accretive 10Gbps plans.
The enterprise segment however is the outperformer, with revenues surging 10.4% y-o-y in 1QFY2024, driven by increased network solutions and cybersecurity services revenue, offset by regional ICT services. The growth was led by increased contributions from data-centre related revenue and project deliveries. “Also, Starhub is set to launch regional data centre cloud connectivity services in 3QFY2024 which we reckon would help support segmental revenue growth,” say the analysts.
Maybank Research too has similar sentiments as it keeps its “buy” call and $1.44 target price on StarHub. Analyst Hussaini Saifee has also pointed out that a mobile industry consolidation remains a potential catalyst, amid strong competition in the consumer segment.
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Despite slower top-line growth, earnings grew by a faster pace, helped by efficiency realisation from its earlier DARE+ investments. “StarHub has pushed forward DARE+ investments in FY2024, which means higher opex/capex but should also mean earlier efficiency realisations,” says Saifee.
Factoring in slightly lower consumer revenues and higher upfront DARE+ investments, the analyst has trimmed FY2024-FY2026 earnings estimates by 1%-3%. He expects core net profit for FY2024 to come in at $161.3 million, $185.3 million in FY2025 and $199.6 million in FY2026.
PhillipCapital too maintained its “accumulate” call on StarHub with a target price of $1.29.
Analyst Paul Chew is upbeat on the group’s strong cybersecurity revenues in 1QFY2024, but is cautious on the weakness in mobile ARPU, no thanks to the competitive environment.
“We believe SIM-only plans allow competitors to offer aggressive price plans with less capital intensity, such as phone subsidies, and MVNOs can compete with comparable network quality. Competition is also entering the lucrative mobile roaming plans. DARE+ becomes a necessity to move away from commoditised network accesses. It allows StarHub to sell more value-added services, including insurance, entertainment, and health-related services,” says Chew.
Morningstar on the other hand, has given a three-star rating out of a maximum five with a target price of $1.26.
Analyst Dan Baker too shares similar sentiments with the street, as he remains cautious on the group’s declining mobile revenue. However, he does expect some near-term profitability, partially a function of the level of DARE+ expenses.
“There was again some discussion at the result briefing around potential consolidation in the Singapore telecom market. With a net debt/EBITDA ratio of around 1.4x and StarHub management’s stated comfort with this level increasing to around 2.5x if the right investment opportunity comes along, we believe StarHub could be a consolidator,” says Baker.
Simba, the fourth mobile operator, would be the most likely target in Baker’s view, although its strong share price appreciation since November 2023 would make such a deal expensive. While he sees Simba’s spectrum assets as attractive for StarHub, he is however less excited about its customer base and network. “We expect the customer base will potentially have a higher churn, and the network may not be easy to integrate with StarHub’s existing mobile networks,” says Baker.
The analyst also thinks a merger with M1 is possible, given they already have a network-sharing deal for 5G. Depending on the price, this deal may make more sense from a network perspective.
However, given how hard the Singapore regulators worked to get a fourth entrant into the market, it is unclear how they would react to such a merger proposal if it came about. “As a general rule, we think the other non-consolidator market players are more certain beneficiaries of market consolidation as it usually leads to a less competitive pricing environment, and they get that for free,” says Baker.
As at 12.45pm, shares. In StarHub are trading at $1.24.
