StarHub: 3Q23 results beat street expectations
- 3Q23 net profit of S$37.3m (+37% y-o-y) 10% ahead of consensus due to lower-than-expected transformation and depreciation costs
- Our revised FY23F/24F earnings are 13%/6% ahead of consensus each; we expect consensus to be raised soon
- Upgrade to BUY with revised TP of S$1.25 based on over 6% yield and FY23-25F earnings CAGR of 8%
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Mobile revenue rose sequentially. Service revenue was S$526.0m (+10% q-o-q, +8.9% y-o-y) in 3Q23. Segment-wise, mobile revenue was S$153.3m (+1.8% q-o-q, +7.2% y-o-y) benefiting from higher roaming, VAS, and subscription revenue. Broadband service revenue was S$62.4m (-0.3% q-o-q, -1.9% y-o-y), based on intensifying market competition. Entertainment revenue came in at S$56.7m (-0.2% q-o-q, +2.3% y-o-y), as y-o-y growth was driven by higher subscription revenue, commercial TV, and ad revenue – mostly from the Premier League. Enterprise business reported revenue of S$253.6m (+23% q-o-q, +15% y-o-y) lifted mainly by Cybersecurity services, which had a revenue of S$115.1m (+52% q-o-q, +45% y-o-y) due to higher project recognitions. STH maintained its service revenue guidance of +3-+5% y-o-y growth for FY23F and service EBITDA margin of 22%. Furthermore, CAPEX commitment guidance for FY23F was also maintained as 11-13% of total revenue.
Automatic termination date extended for Ensign. Cybersecurity remains pivotal on driving STH’s service revenue growth; hence, STH has retained the assigned rights of Ensign for an additional two years, with the automatic termination date being fixed for 4 Oct 2025. This also supports STH’s transformation programme and enterprise strategy.
STH expects transformation investments to be lower than S$310m. STH was anticipating incurring an estimated S$310m in DARE+ investments over FY22-FY24F; however, it has managed to negotiate lower transformation costs. Previously, we projected S$120m/S$84m to be incurred in FY23F/24F, which we lower to S$80m each now. The composition of capex and opex still remains the same at 60% and 40% respectively. STH has also committed to a minimum DPS of 5Scts or 80% of its net profit, whichever is higher in FY23F.
Our revised FY23F/FY24F earnings are 13% /6% above consensus. Earlier, we were 18% below consensus due to higher depreciation and finance costs (we estimated a much higher transformation cost). Dare+ transformation has also led to a big drop in maintenance capex over the last three years, leading to a drop in deprecation and finance costs. This has led to a higher earnings growth compared to EBITDA growth. We have now factored in Service EBITDA margin of 22%, in line with management expectations for FY23F. We project an earnings CAGR of 8% over FY23-25F coupled with an over-6% yield. Thus, we raise our FY23F/FY24F earnings by 38%/26% to reflect the above developments and expectations. We also expect consensus to follow suit and raise their earnings.
Upgrade to BUY with revised TP of S$1.25 due to 26%/25% revision in our FY24F/25F earnings. We use a DCF methodology with WACC of 8.5% (prev 8.3%) and terminal growth rate of 0%. We expect StarHub to re-rate from an 12x FY24F Price to Earnings ratio (PER) to 15x, still lower than its last four-year historical average of 18x. At our TP of S$1.25, StarHub would be trading at a 5.7% FY24F dividend yield
FY Dec | 1H2022 | 2H2022 | 1H2023 | % chg yoy | % chg hoh |
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Revenue | 1,059 | 1,269 | 1,106 | 4.5 | (12.8) |
Cost of Goods Sold | (833) | (1,214) | (878) | 5.4 | (27.7) |
Gross Profit | 226 | 55 | 228 | 1.1 | 317.9 |
Other Oper. (Exp)/Inc | (130) | (124) | (121) | (6.8) | (2.1) |
Operating Profit | 96 | 59 | 107 | 11.8 | 81.2 |
Other Non Opg (Exp)/Inc | 0 | (29) | 0 | nm | Nm |
Associates & JV Inc | 2 | 1 | 2 | 6.3 | 240.0 |
Net Interest (Exp)/Inc | (21) | (16) | (13) | 39.4 | 22.5 |
Exceptional Gain/(Loss) | 1 | 2 | 0 | nm | nm |
Pre-tax Profit | 77 | 16 | 96 | 24.8 | 497.6 |
Tax | (16) | (8) | (21) | 34.8 | 167.9 |
Minority Interest | (1) | (7) | 2 | nm | nm |
Net Profit | 61 | 1 | 77 | 25.9 | 5,892.2 |
Net profit bef Except. | 60 | (1) | 77 | 27.0 | (10,752.8) |
EBITDA | 231 | 159 | 232 | 0.0 | 46.0 |
Margins (%) |
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Gross Margins | 21.3 | 4.3 | 20.6 |
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Opg Profit Margins | 9.0 | 4.7 | 9.7 |
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Net Profit Margins | 5.8 | 0.1 | 6.9 |
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