StarHub might acquire Singapore’s fourth telco operator, Simba, as part of a possible industry consolidation already seen in other regional markets, according to Sachin Mittal of DBS Group Research.
“Southeast Asian telecom industry is witnessing consolidation to improve operational efficiency, improve net debt to ebitda position and channel resources into new investments such as cloud, IoT and data centres,” says Mittal.
For example, Indosat Ooredoo and Hutchison Indonesia merged, and the industry’s ebitda margins are improving. “It is about time that the Singapore market goes through consolidation to further enhance 5G investment and experience,” adds Mittal, writing in his Oct 4 report.
Mittal sees several reasons why Simba’s shareholders might be keen to sell. First, Simba is seeing slower growth in its subscriber market share, with gain dipping from 3% in 2021 to just 1% in 2022. “We expect Simba’s subscriber market share to hover between 10%–12% in the long-term due to stiff competition,” says Mittal.
Although Simba has narrowed its ebitda losses and reported a positive ebitda of $31 million in FY2023 ended July, it is still has a negative free cash flow of $14.1 million, defined as ebitda less capex, which is increasing because of investments to widen its 5G network. From a capex of $45 million in FY2023, Simba has guided for a capex of between $45 million and $50 million for the current FY2024.
According to Mittal, Simba now has “decent” outdoor 5G coverage but further capex is required for indoor coverage. Meanwhile, with its 60% 5G coverage, it lags the three bigger operators significantly. “Providing reliable and strong indoor coverage is pivotal for Simba but the capex requirement for indoor coverage will be high which requires more differentiated and extensive network capabilities in more dimensions,” the analyst reasons.
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Mittal notes that Simba, which is Australia-listed under the name Tuas, had a book value of A$444 million ($389 million) as at July 31, which includes net cash of A$41 million, implying a book value minus net cash of A$403 million. Based on its current market cap of around A$990 million, the ratio to enterprise value is at 2.5x. “It might make sense to cash out due to the rising 5G capex commitments,” says Mittal.
Mittal believes that Simba’s most attractive asset, at least for StarHub CC3 , is its spectrum rights. Back in 2016 when the government allowed a fourth mobile operator to disrupt Singtel-StarHub-M1’s three-way oligopoly, Simba, then known as TPG, won two spectrums for just $105 million. With the addition of more spectrums, Simba has paid a total of about $160 million. Based on what other telcos paid for subsequently, Mittal estimates the value of the spectrum held by Simba to be worth at least $370 million.
On the other hand, Mittal sees StarHub as having “ample capacity for future investments aimed at driving growth”, given its low net debt to ebitda ratio of 1.57x as of 1HFY2023 ended June, which is seen to dip to 1.25x in the coming FY2024.
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“This financial strength ensures sufficient flexibility for seizing potential opportunities that may arise,” says Mittal, estimating that if StarHub pays between $875 million to $1 billion for Simba, its net debt to ebitda could rise to 2.8x–3.0x.
Besides taking on debt, StarHub could fund potential acquisitions by drawing on $50 million it set aside in June for a share buyback programme — an amount equal to 51.9 million or 3% of its share base. Mittal, citing StarHub, notes that the shares bought back are being held as treasury shares and can also be used for acquisitions.
“Consolidation is required in Singapore for average revenue per user (ARPU) to improve and the players investing more to improve customer experience,” says Mittal. “Consolidation in this sector offers advantages due to economies of scale, resulting in cost savings on both capital investments and operational expenditures,” he reiterates.
In 2022, total Singapore mobile revenue including equipment sales stood at $3.7 billion, Mittal estimates can recover by 15%– 20% gradually over three to four years in case of any consolidation. “It may be fair to acquire Simba at over 20x forward EV/Ebitda, due to the value of the spectrum and future market repair,” adds Mittal.
As StarHub has an existing mobile network sharing arrangement with M1, a merger between the telcos has been floated previously. However, given how M1 is showing better numbers, Keppel, which owns it, is seemingly not in a hurry to do a deal even as it steadily divests other assets. When asked at Keppel’s 1QFY2023 briefing, CEO Loh Chin Hua declined to comment on this possibility, although he added: “I think we are in a pretty good space right now, and we are focused on growing M1. I think these are very exciting times for M1.”
According to Bloomberg data, StarHub has six “buy” calls, with the most bullish being Goldman Sachs with a $1.50 target price. The “buy” camp is outnumbered by eight other analysts rating the stock “hold”, with the most conservative target price of $1.02 coming from Macquarie. Tuas, quoted on the ASX, has a lone call by Morgan Stanley to “buy”, with an A$2.40 target price.
