StarHub: FY22 normalised earnings was 14% below our estimates
- FY22 normalised earnings of S$114.2m (-23% y-o-y) was 14% below our estimates due to higher EPL costs possibly
- FY23F guidance is in line with ours but may lead to 18-20% cut in consensus earnings; we raise FY24F earnings by 5% due to sharp drop in transformation opex potentially.
- Maintain HOLD, TP revised to S$1.05
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FY22 service EBITDA of S$410m (-15% y-o-y) was 6% below our forecast of S$438.3m. This was mainly due to a rise in cost of services due to EPL content costs and other operating expenses arising from the consolidation of JOS SG and JOS MY. Normalised operating expenses excluding the S$30.8m DARE+ provisions increased by 18% y-o-y to S$2,150m. Normalised service EBITDA margin stood at 21.7% in FY22, which exceeded management guidance of 20%, but was below our forecasted margin of 23.4%.
FY22 service revenue of S$1,889m (+17% y-o-y) were in line with our estimates. Service revenue which excludes equipment/ handset sales reported S$1,889m (+17% y-o-y) for FY22 which was in line with our expectations but above the management guidance of 12%-15% y-o-y growth given in Nov 2022.
Mobile revenue during FY22 was S$564m (+7.4% y-o-y), representing 97% of our FY22F forecasts. 4Q22 postpaid average revenue per user (ARPU) improved q-o-q to S$32 from S$31 mainly due to higher roaming and VAS revenue, offset by lower voice subscription, IDD and excess usage revenue and the migration towards SIM-only plans. In 4Q22, postpaid subscriber base improved to 1.56m (+1.2% q-o-q) while prepaid subscriber base increased by ~18,000 q-o-q to 591,000, stemming from gradual travel recovery from tourists and foreign workers as a result of reopening of borders. Equipment revenue witnessed a 1.7% y-o-y increase to S$439m.
Broadband service revenue increased by 25% y-o-y to S$242m, mainly due to the consolidation of MyRepublic Broadband that contributed revenue of S$37.8m in FY22 alongside continued take up of the higher value StarHub 2Gbps plans.
STH’s entertainment revenue for FY22 improved to S$216m (+16% y-o-y) predominantly due to higher subscription revenue, commercial TV and advertising revenue driven mostly by the Premier League and World Cup. Total entertainment subscribers dropped by 14,000 q-o-q reaching 478,000 as at 4Q22.
Enterprise business revenue of S$866m (+23% y-o-y) was 3% above our projections. Higher contributions from data and internet resulting mainly from the consolidation of MyRepublic broadband, managed services resulted in recording S$366m (+1.1% y-o-y) for network solutions. STH’s cybersecurity services maintained double digit growth and reported revenue of S$301m (+12% y-o-y) mainly lifted by higher revenue derived from overseas market. On regional ICT services, revenue was at S$199m (+162% y-o-y) due to the consolidation of JOS SG and JOS MY.
Service revenue y-o-y growth guidance is 8-10% for FY23F where the mid-point guidance is in line with our previous estimate. STH has guided service revenue y-o-y growth of 8-10% during FY23F (+17% y-o-y in FY22) where the mid-point guidance is in line with our previous estimate. Service EBITDA margin is expected to hover at 20% due to transformation opex, stable electricity tariffs and rise in staff cost. Capex commitment made in FY22 amounted to S$170.4m which was 7.3% of total revenue, well below the guidance of 9-12% of total revenue. Management indicated a higher capex commitment in FY23F of 13-15% of total revenue due to delay in IT transformation and investments, which will be spent on cloud infinity network transformation and other DARE+ business initiatives.
STH has raised transformation investments from S$270m to S$310m and maintains its dividend policy. STH has raised its DARE+ investments estimate to S$310m from S$270m earlier primarily due to investments required for cloud infinity network transformation. Almost S$31m transformation cost were included in during FY22 and the remaining deferred to FY23F and FY24F, as there was a 3–5-month delay in FY22 investments. We project (i) S$70m transformation opex and S$150m transformation capex in FY23F, and (iii) S$30m transformation opex and S$30m transformation capex in FY24F. STH has also committed to a minimum dividend per share (DPS) of 5Scts or 80% of its net profit, whichever is higher in FY23F.
Our FY23F earnings are 20% below consensus. EPL rights related content cost will be recognized for the full year in FY23F compared to the 5 months in FY22. The rise in opex will largely offset the recovery in mobile and enterprise. We have revised our FY23F/24F service revenue by 1%/3% to meet the higher end of management guidance for FY23F. We project 20%/22% in service EBITDA margin for FY23F/FY24F, in line with management guidance for FY23F. We have also factored in higher capex in line with management guidance. We project S$103m earnings in FY23F compared to consensus estimate of S$125m as per Thomson-Reuters.
Maintain HOLD with a revised TP of S$1.05. Our DCF valuation is revised to S$1.05 (prev S$1.02) due to upward revision in our FY23F/24 earnings due to a sharp drop in transformation opex. We use a WACC of 8.3% (previously 8.2%) and terminal growth rate of 0% in our DCF valuation.
FY Dec | 2H2021 | 1H2022 | 2H2022 | % chg yoy | % chg hoh |
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Revenue | 1,069 | 1,059 | 1,269 | 18.7 | 19.8 |
Cost of Goods Sold | (812) | (833) | (1,214) | 49.6 | 45.8 |
Gross Profit | 257 | 226 | 55 | (78.8) | (75.8) |
Other Oper. (Exp)/Inc | (130) | (130) | (124) | (4.8) | (4.8) |
Operating Profit | 127 | 96 | 59 | (53.5) | (38.3) |
Other Non Opg (Exp)/Inc | (3) | 0 | (29) | (873.3) | nm |
Associates & JV Inc | 2 | 2 | 1 | (78.3) | (68.8) |
Net Interest (Exp)/Inc | (23) | (21) | (16) | 28.4 | 21.8 |
Exceptional Gain/(Loss) | 1 | 1 | 2 | 100.0 | 300.0 |
Pre-tax Profit | 105 | 77 | 16 | (84.6) | (79.1) |
Tax | (23) | (16) | (8) | (65.6) | (49.7) |
Minority Interest | (1) | (1) | (7) | (1,066.7) | 1,066.7 |
Net Profit | 81 | 61 | 1 | (98.4) | (97.9) |
Net profit bef Except. | 80 | 60 | (1) | nm | nm |
EBITDA | 264 | 231 | 159 | (40.0) | (31.5) |
Margins (%) |
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Gross Margins | 24.1 | 21.3 | 4.3 |
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Opg Profit Margins | 11.9 | 9.0 | 4.7 |
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Net Profit Margins | 7.6 | 5.8 | 0.1 |
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