Starhub: A laggard among the telcos
What’s New
STH is our new top pick due to the recent rally in other telcos while offering the highest growth in earnings and superior yield. All major telcos in Singapore have performed well YTD with Singapore Telecommunications (Singtel) gaining the most, by 35%. This was largely driven by the improvement in its core business, growth in the mobile segment, rise in associate values, and improving visibility in its data centre business. STH grew by 8% YTD, but is still trading at 12x PER, compared to its last five-year average of 17x. Compared to its peers, STH is the cheapest, trading at a ~52% discount to the peer average of 28x and we expect STH to have a superior dividend yield of 6.2%/6.8% for an estimated DPS of 7.4/8.2 Scts in FY24/FY25F compared to its peers Singtel and NetLink.
There are still concerns about the Mobile segment, but this is largely in the low-end market. STH’s mobile revenue in 2Q24 was flat q/q at SGD144.5mn but dropped 4% y/y from migration to SIM-only plans and competition in the low-end market. This was in contrast to Singtel, which recorded a 4% hike q/q (up 7% y/y) in mobile revenue. Singtel benefits more from roaming due to business travel and tourism compared to STH, which largely generates income from the local market.
STH will benefit from declining transformation costs and revenue growth in cybersecurity services. Consensus expects STH’s Cybersecurity revenue (excluding D’Crypt) to see a CAGR of 18% over FY23-25F. STH expects the Managed services segment to grow in the next two to three years. Managed Network Services segment includes Managed Cloud Services (supporting cloud adoption, migration, and optimisation), and Managed Unified Communications (UC) (enhancing business communication and collaboration). STH Managed Services is led by StarHub Cloud Infinity, a multi-cloud platform that helps businesses adopt cloud services and grow. The company plans to launch its low-latency data centre connect solution in 3Q2024 that will offer ultra-low latency connectivity between data centres with network slicing and bandwidth-on-demand features. It is planned to be extended regionally in 2025 with multiple built-in international routes for path protection. Consensus also expects ST’s (March YE) Nxera Data centre revenue and revenue from NCS to grow at a CAGR of 18% and 5%, respectively, over FY24-26F. ST expects to double its Singapore DC EBITDA by 2028, excluding its Batam, Johor, & Thailand JVs. ST seeks to operationalise >200MW by end-2026 out of its >400MW inventory. This implies that Data centre EBITDA might rise from SGD163mn in FY24 to SGD326mn by FY28. Consensus expects ST’s Digital InfraCo segment (Including both Data centre and Satellite and Paragon platform) and NCS to grow at a CAGR of 12% and 9%, respectively, over FY24-26F. STH is also benefitting from the drop in transformation cost (DARE+) in the near term. STH had guided that they expect to incur c.10% of the total SGD270mn DARE+ cost in 2025 and complete c.90% of that total spending by the end of 2024, resulting in STH incurring c.SGD23mn of transformation-related opex in FY24F and c.SGD12mn in FY25F.
STH’s cybersecurity business could fetch a valuation of SGD0.23-0.35 per share. based on our estimated FY24F revenue. Ensign recorded revenue of SGD75.4mn in 2Q24 (+13% y/y, +17% q/q) due to higher project recognition, and STH will remain focused on driving cybersecurity business growth through strategic investments in R&D and talent. Ensign recorded SGD303.9mn (+21% y/y) in revenue and reached an operating profit of SGD2.0m in FY23 (cybersecurity operating profit was SGD1.5mn and D’Crypt recorded a loss of SGD0.5mn). Ensign has grown by an estimated 30% over the last five years but was making losses as it continued to invest for growth. Ensign secures 51% of its revenue from services and 49% from products. STH has retained the assigned rights of Ensign for an additional two years, with the automatic termination date being fixed for 4 Oct 2025. Achieving breakeven excluding D’Crypt should be a stepping stone towards the public listing of Ensign, in our view. Based on the peer average of 4x-6x for cybersecurity companies which are largely product focused, we apply a conservative 2x-3x price to FY24F revenue (excluding D’Crypt) for Ensign’s relatively smaller size and a lower product business contribution. We estimate Ensign alone to be worth SGD0.73-1.1bn. Given STH’s 55.73% effective stake in Ensign, the stake is worth SGD0.23-0.35 per share. This represents 19%-28% of STH’s market cap of SGD2.2bn.
Ensign is expected to grow at a CAGR of 21% over 2024-2026. We expect Ensign to grow revenue at a 20% CAGR over 2024-2026, slightly above the Asia Pacific (APAC) cybersecurity spending CAGR of 19% (vs. global CAGR of 13%). Ensign will pursue higher value and more complex projects across the region while improving its revenue mix.
Starhub enterprise business is aligned to the vision of smart nation. Starhub is evolving from just a traditional telco player into new areas such as digital and cloud transformation, catalysed by cybersecurity, AI, and smart cities.
Business model for new services appears to be of a one-time development fee + recurring portion via managed services. Monetisation in place with the platform already in place. Further intentions to scale this business, potentially regionally as well. Margins for this business higher than IT services. Leverages the flywheel effect where data collected from its telco network forms the foundation for Gen AI and building a smart nation amongst many use cases.
- Advertising (Moove media) – the collection of not only location data but personas (audience behaviour / top sites or apps visited which tells the persona).
- Smart nations (Punggol digital district by JTC) – insights generated by infrastructure e.g enabling the visualisation of cloud density.
- Smart retail platforms – user insights augmented by retailer data and Gen AI capabilities = incremental footfall and improved engagement + unified insights for strategic review.
- Transport (SBS) – passenger experience especially railway disruption, helps with crowd control / resource planning of logistic
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