StarHub has been on its DARE+ transformation journey since it was announced in November 2021, less than a year after CEO Nikhil Eapen joined the company.
Analysts have been cautious about the transformation and rather bearish on the stock as they were wary about the cost involved.
However, by FY2025 ending December 2025, this extensive, multi-year transformation programme of replacing legacy IT platforms and systems will be completed. The result should see a reduction in costs and an improvement in margins.
Says Eapen: “We are generating strong free cash flow, which alongside our dividend yield, supports our DARE+ transformation into a company that offers total shareholders’ return. We remain focused on our DARE+ execution where we expect to largely complete the build and investment phase by end-FY2024.”
In 1QFY2024 ended March, StarHub CC3 reported earnings of $40.1 million, up 8.1% y-o-y, on higher service revenue growth. Service revenue, which excludes items such as the sale of equipment, increased 1.9% y-o-y to $458.9 million, which is in line with its FY2024 growth guidance of between 1% and 3%.
This was due to its enterprise business segment, which saw a 10.4% y-o-y revenue increase to $197.7 million, led by cybersecurity and network revenue growth. However, total revenue was somewhat unchanged, declining 0.1% y-o-y to $545.4 million, mainly due to lower equipment sales but partially offset by higher service revenue.
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Mobile revenue, StarHub’s single largest business segment, saw a 4.6% y-o-y drop in revenue to $145.2 million, with more subscribers eschewing costlier traditional bundled subscriptions that come with handset subsidies for SIM-only plans. Lower excess usage revenue also dipped. StarHub will counter this trend by offering more attractive handset-bundling plans and new services. Despite the competitive landscape, average revenue per user (ARPU) was stable y-o-y at $32.
Analysts maintain ‘buy’ calls
Analysts have stayed positive and kept their “buy” recommendations on StarHub. DBS Group Research has maintained its “buy” call and $1.54 target price. It expects an 8% earnings CAGR for FY2023–FY2025 and a 5.8% dividend yield.
StarHub had earlier guided to incur transformation costs of $54 million in FY2024, or a fifth of the total of $270 million, with the remaining $27 million to be spent in FY2025. With the transformation completed ahead of schedule, StarHub is seen to incur about $100 million in transformation costs in FY2024, with no residual spending in FY2025.
Furthermore, there has been a change in the capex/opex split to 55%/45% from 60%/40%. Due to this, DBS believes that FY2024 earnings could adversely be impacted by $15 million. However, StarHub is expected to maintain its FY2024 service ebitda margin and capex guidance on cost efficiencies.
Similarly, UOB Kay Hian continues to rate StarHub a “buy” with the same target price of $1.41 as the 1QFY2024 numbers are in line with the expectations of analysts Chong Lee Len and Llelleythan Tan.
“Moving into 2QFY2024, we expect some downside to service revenue growth given the 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 a 6.3% yield.
Chong and Tan expect mobile competition to remain intense while entertainment is affected by seasonality due to the cessation of promotions and the absence of one-off revenue contributions from the Cricket World Cup.
The analysts observed that StarHub maintained its broadband segment steadily due to new customer acquisitions and the ongoing shift of existing subscribers to higher-speed packages of up to 10GBps.
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With its revenue jump of more than 10%, the UOB Kay Hian analysts note that the enterprise segment is the outperformer, underpinned by increased network solutions and cybersecurity services revenue but 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.
PhillipCapital’s Paul Chew also maintains his “accumulate” call on StarHub with a target price of $1.29. Although he is upbeat about the strong growth in cybersecurity revenue in 1QFY2024, he is cautious about the weakness in mobile ARPU due 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.
Maybank Securities’ Hussaini Saifee has kept his “buy” call and $1.44 target price. While acknowledging the strong competitive pressures in the consumer segments, he believes an industry consolidation will be a potential catalyst.
Despite slower top-line growth, earnings grew at a faster clip, 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 FY2024 core net profit to come in at $161.3 million, $185.3 million in FY2025 and $199.6 million in FY2026.
Morningstar’s Dan Baker shares concerns over the pressure facing StarHub’s mobile segment but sees some near-term profitability, partially a function of the level of DARE+ expenses. Baker is also upbeat about a potential consolidation or merger involving StarHub and believes that the telco, rated three stars out of a maximum of five, with a $1.26 target price, is a prime consolidator in the industry.
