Although StarHub&rsquo s 1HFY2023 ended in June results were above expectations, CGS-CIMB Research analysts have reiterated their &ldquo hold&rdquo call at an unchanged target price of $1.15, in anticipation that it will take time for the telco to reap the fruits of its transformative efforts.

 

&ldquo We expect earnings growth to remain weighted by the ramp-up in transformation costs,&rdquo write analysts Kenneth Tan and Lim Siew Khee.

 

StarHub reported a net profit of $76.7 million, forming 71% of CGS-CIMB&rsquo s full-year forecast. Its revenue of $938.1 million was a &ldquo slight miss&rdquo , but ebitda was in line at $230 million due to cost rationalisation efforts, Tan and Lim note.

 

Service ebitda margin remained healthy at 22.7%, an increase of 6.4% percentage points (ppts) h-o-h, tracking ahead of the group&rsquo s initial FY2023 guidance of about 20%, they add.

 

Mobile revenue, driven by stable postpaid average revenue per user (ARPU) and continued subscription growth, was in line with the analysts&rsquo expectations, but cybersecurity reported an operating loss of $8.9 million (compared to the $0.5 million profit in the 1HFY2022), on the back of higher staff and research and development (R& D) expenses.

 

The analysts note that StarHub&rsquo s management has raised its FY2023 service ebitda margin guidance to about 22%, from 20% previously, in view of two factors. Its Dare+ initiatives has realised more operational efficiencies than thought, and the lesser-than-expected contribution from lower-margin businesses D&rsquo Crypt and JOS Singapore.

&ldquo The group also now expects to incur lower Dare+ transformation costs in FY2023 of $120 million (from $155 million previously) due largely to cost rationalisation StarHub has incurred $30 million year-to-date, indicating costs to be back loaded into 2HFY2023 and possibly into FY2024, in our view,&rdquo say Tan and Lim.

 

With this, the analysts expect StarHub&rsquo s 2HFY2023 core net profit to trend sequentially lower to $41 million, a decline of 47% h-o-h.

 

In addition, Tan and Lim say that StarHub has lowered its FY2023 revenue growth guidance to 3%-5%, from 8%-10% previously, in view of material project delays for D&rsquo Crypt and ongoing rationalisation of JOS Singapore&rsquo s order pipeline towards higher-margin projects.

 

&ldquo While we see a positive outlook for its other enterprise businesses (Ensign, JOS Malaysia, Strateq), we expect near-term slowdown for D&rsquo Crypt and JOS Singapore as the group works through their transient issues,&rdquo they say. &ldquo Back-end loaded delivery of projects should support h-o-h segment revenue growth in 2HFY2023, in our view.&rdquo

 

With these new assumptions, Tan and Lim have raised their FY2023-FY2025 earnings per share by 6%-9%.

 

&ldquo Upside risks include lower Dare+ costs, faster reaping of transformative efficiencies, and mobile market consolidation. Downside risks include stiffer competition, and cost overruns,&rdquo they write.

StarHub CC3 0.00% has reported net profit attributable to shareholders of $76.7 million for 1HFY2023 ended June, up 25.8% y-o-y, lifted mainly by higher contributions across all business segments.

 

Service revenue grew 7.8% y-o-y to $938.1 million during the half-year period, says StarHub on Aug 3, lifted by a 12.8% revenue growth in its mobile segment, 7.6% for its broadband segment, 18.2% for its entertainment segment and 1.8% for its enterprise segment.

 

The group has declared an interim dividend of 2.5 cents for 1HFY2023, while reiterating its dividend guidance of at least 5.0 cents per share in FY2023.

 

StarHub&rsquo s total revenue of $1,106.1 million for 1HFY2023 was 4.5% higher y-o-y, while its operating expenses grew 3.5% y-o-y to $1,000.7 million over the same period.

 

Earnings per share for 1HFY2023 stands at 4.2 cents, up from 3.3 cents this time last year with a smaller base of 1,728,925 shares compared to 1,730,859 this time last year.

 

As at June 30, the group&rsquo s net asset value per share stands at 32.5 cents, up from 30.7 cents as at Dec 31, 2022.

 

Average revenue per unit (ARPU) grew y-o-y across most segments, says StarHub. Postpaid ARPU rose to $32 from $29, broadband ARPU grew to $34 from $33 and entertainment ARPU grew to $44 from $38.

 

Meanwhile, enterprise revenue was bolstered by a 4.6% increase in network solutions revenue, and buoyed by a 20.6% growth in the group&rsquo s managed services, as well as a 7% growth in cybersecurity services revenue.

 

These were offset by a 10% y-o-y decline in regional ICT services due to lower hardware sales, says StarHub.

 

As at June 30, the group&rsquo s total non-current assets of $1,705.5 million was $9.1 million lower compared to Dec 31, 2022.

 

The decrease was primarily due to lower intangible assets, lower property, plant and equipment (PPE) and lower right-of-use (ROU) assets partially offset by higher investments in a joint venture and higher contract assets.

 

Total current assets as at June 30 decreased by $158.6 million to $1,260.7 million, mainly due to lower cash and cash equivalents, lower contract assets, lower contract costs, lower amounts due from related parties and lower balances in trade receivables, other receivables, deposits and prepayments, says StarHub.

 

Meanwhile, total current liabilities decreased $166.0 million to $994.2 million as at June 30, mainly due to lower trade and other payables coupled with lower contract liabilities partially offset by higher provision for taxation and higher lease liabilities.

 

StarHub attributes the decrease in total non-current liabilities by $28.5 million to $1,261.4 million as at June 30 to lower lease liabilities and lower deferred tax liabilities.

 

StarHub chief executive Nikhil Eapen says StarHub is investing &ldquo significantly&rdquo in transformation in 2H2023, towards &ldquo harvesting benefits from 2024&rdquo . &ldquo Our objective is to enhance total shareholder returns and deliver first-of-its-kind value to our Singapore society.&rdquo

 

World&rsquo s first autonomous metropolitan cloud network

 

Through its IT and network transformation efforts, StarHub is also progressing towards building the world&rsquo s first autonomous metropolitan cloud network through Cloud Infinity. Eapen explains that this allows StarHub&rsquo s customers to provision multi-cloud securely and effectively, from core to edge.

 

&ldquo This is something that we are building for ourselves &mdash moving our network onto the combination of hybrid and public cloud &mdash which gives us a great degree of scalability, resilience and agility in our network, aside from the ability to apply artificial intelligence to monitor our network better. This is something we are externalising with the same benefits for our enterprise customers, largely,&rdquo says Eapen.

 

He clarifies that there are several operators that have built networks on the cloud, while some other larger operators around the world have moved segments of their network onto the cloud. That said, StarHub will be the first operator globally to move their entire network onto the cloud, Eapen notes.

 

The rollout for the autonomous metropolitan cloud network is currently on track and StarHub is co-creating minimum viable product trials with selected beta enterprise clients. The company will share more about the projected timeline in the coming months.

 

Responding to a query about possible mergers and acquisitions with other telco operators, Eapen reiterates that he believes consolidation is healthy in the industry. StarHub is also comfortable and confident in the progress of its DARE+ transformation, which is starting to contribute a &ldquo good profitability upswing&rdquo .

 

&ldquo In addition to profitability, we had strong free cash flow, even through this investment cycle as well as very low leverage. So we are positioned, ready and able to acquire should the opportunity present itself, but we are not in a position to provide specifics on potential behaviours or perspectives of other operators,&rdquo says Eapen.