STARHUB : CC3 0%posted a net profit of S$72.9 million for the second half of its financial year ended Dec 31, 2023, from S$1.3 million over the same period a year earlier.

 

In 2022, the company recorded higher non-operating expenses from impairment losses of certain legacy network assets coupled with goodwill and intangible assets from Strateq, the company&rsquo s information and communications technology arm.

 

This comes as the company&rsquo s revenue over the same period fell 0.1 per cent to S$1.3 billion.

 

Meanwhile, its service revenue grew 3 per cent to S$1.1 billion, while service earnings before interest, taxes, depreciation and amortisation (Ebitda) rose 33 per cent to S$219 million.

 

StarHub chief executive Nikhil Eapen said that the increase in service Ebitda margin came on the back of growth in high-margin segments, such as in mobile services. He noted that it was also achieved despite &ldquo significant&rdquo spending on the company&rsquo s Dare+ transformation plan.

 

Dare+ is a programme StarHub rolled out in 2021 that aims to harness 5G Internet of Things products and solutions and cloud connectivity to deliver sustainable revenue growth and reduce operating expenditure.

 

Eapen also expects the company&rsquo s move to substitute legacy capital expenditure with operating expenditure to improve its net margin efficiency and increase net profit as a percentage of Ebitda.

 

He said that the move has allowed the company to pay a good dividend and reduce its net debt slightly to 1.36 times the company&rsquo s Ebitda.

 

For the second half of FY23, the company declared a final dividend of S$0.042 per share. This brings the full-year dividend up to S$0.067 per share, higher than the S$0.05 per share of dividends distributed in FY22.

 

For the full year ended Dec 31, 2023, StarHub posted a 140.4 per cent rise in net profit to S$149.6 million, while revenue rose 2 per cent to S$2.4 billion. The company had set an interim milestone to achieve S$150 million in net profit by FY23 when it launched Dare+ in 2021. 

 

Chief financial officer Dennis Chia said that the company has about S$80 million in Dare+ expenditure this year.

 

With these expenses accounted for, the company has guided for a dividend of at least S$0.06 in FY24. It has also reiterated its commitment to distributing at least 80 per cent of its net profit after tax, adjusted for one-off, non-recurring items.

 

Beyond the company&rsquo s Dare+ plans, Eapen said that he will be looking at mergers and acquisitions through two prongs.

 

Firstly, Eapen noted that the company remains &ldquo ready and able&rdquo to consolidate with other local players. &ldquo We have low leverage, we have lots of funding firepower, we have execution credibility&hellip and we have experience in making acquisitions but you can&rsquo t force these things. They have to take their time,&rdquo he pointed out.

 

Eapen sees consolidation as a regular feature of every market and a &ldquo natural course of things&rdquo , with telcos in Malaysia, Indonesia and Thailand all seeing moves to consolidate in some form within the last 18 months.

 

Secondly, the company is looking for opportunities to grow its regional enterprise business beyond Singapore and Malaysia in the area of managed services and cloud networking.

 

Currently, the company derives about a fifth of its service revenue from overseas operations under Strateq, Jos Malaysia and Ensign&rsquo s regional operations.

 

&ldquo We want to acquire companies that are more cloud native in the way that they do things, and in scale markets in the region, we don&rsquo t want to be managing far-flung operations,&rdquo Eapen added.

Telco will be decommissioning costly legacy systems, starting in the middle of this year, and is also working on wrapping up its cloud transformation

 

BEFORE the end of his first year at the helm of StarHub, Nikhil Eapen did the unthinkable. 

 

Eapen became the chief executive of StarHub on Jan 1, 2021. And Singapore&rsquo s second-biggest telco looked on track to wrap the year with decent revenue growth, good earnings before interest, taxes, depreciation and amortisation (Ebitda) expansion, and strong free cash flow.

 

But, in November 2021, he went to the market to announce an audacious multi-year plan that was going to cost S$270 million and diminish its service Ebitda margin from 30 per cent to around 20 per cent in the coming years.

 

Much of the jargon used then &ndash such as cloud, infinity play, and transformation enablement &ndash flew right over the heads of many observers. And frankly, they still do.

 

But executives now see some light at the end of the tunnel, and Eapen says that he is proud of the baby with a plucky name: Dare+.

 

Despite its toll on capital expenditure and operating expenses (opex) over the past two years, Dare+ has brought StarHub out of a situation where it runs its network in a &ldquo very monolithic&rdquo way.

 

Eapen explained that monolithism, which many of StarHub&rsquo s competitors are still subjected to, comes when a telco is required to &ldquo use a lot of energy &ndash probably more than is needed, because not everyone needs all that bandwidth all the time across your entire network&rdquo .

 

With Dare+, StarHub is close to shifting its network from legacy platforms towards one that operates off a combination of hybrid and public multi-cloud systems, he said.

 

When this process completes &ndash targeted for mid-2024 for its consumer business and end-2024 for its enterprise businesses &ndash StarHub will become the first &ldquo brownfield&rdquo telco in the world to cloudify an existing network, he noted. 

 

Brownfield challenges

 

Running it off the cloud means that &ldquo you can pinpoint the delivery of that bandwidth to where it&rsquo s needed, how much it&rsquo s needed, to the specific requirements of the customer at that point in time&rdquo , Eapen said.

 

This includes when enterprises need the network to support more data-intensive operations requiring multi-access edge computing. It is about managing transmission in a dynamic way, for it to go where it is needed, rather than providing it uniformly at maximum capacity with a buffer across the entire network, he added.

 

Telco operators playing in this arena are Japan&rsquo s Rakuten Mobile, United States&rsquo Dish Network, and India&rsquo s Reliance Jio. These are &ldquo greenfield telcos&rdquo , however. For brownfield telcos like StarHub, a company founded more than 25 years ago, the added challenge is in reskilling engineers who have not worked with the cloud from day one, Eapen noted.

 

The transition is also opex-heavy, with StarHub having to keep both the old and the new systems running. Opex are up almost 18 per cent, with S$1.57 billion spent in the first nine months of 2023, versus S$1.33 billion over the same period in 2021.

 

Net profit initially suffered, falling 18.4 per cent from S$108.2 million for the nine months in 2021 to S$88.3 million in 2022. Earnings have since rebounded 29.1 per cent to S$114 million in the first nine months of 2023 though &ndash a result that Eapen attributes to the beginnings of Dare+ taking effect.

 

The market, however, has not taken to StarHub&rsquo s new direction. Its share price has shed a fifth of its value since late-2021 when Dare+ was announced. The counter last closed at S$1.09 on Jan 5.

 

Profit goals

StarHub will soon scrap its legacy platforms though, heralding a season of reaping. Being infrastructure-heavy, these platforms come with substantial running costs that will soon be a thing of the past.

 

Eapen said that the decommissioning will start in the middle of 2024 and stretch into 2025, sparking three things: sustained revenue growth, a tailing-off of transformation spend, and harnessing of efficiencies. 

 

The efficiencies, through automation and cost reduction, are expected to kick in from the second half of 2024 onwards. &ldquo With all three things in combination, our goal is strong profitability growth,&rdquo he said.

 

Will StarHub subscribers feel a change? This is where Eapen perks up. &ldquo Imagine a world where you&rsquo re not stuck within these rigid legacy telco bundles, and you can self-serve and build your own package.&rdquo

 

He continued: &ldquo Imagine that world where a platform has embedded within it data and artificial intelligence capabilities, so we can suggest products that are suitable for you based on our very deep understanding of you.

 

&ldquo Also imagine this world where we make all of these things available to you at a price point and a value, which frankly pales in comparison to the delight and lifestyle enrichment and the safeguards that you get.&rdquo

 

Consumers will start experiencing such changes by the middle of the year, he added.

 

Eapen offered a piece of trivia: &ldquo For cloud gaming, do you know that more than half of our customers are not StarHub&rsquo s connectivity customers? A lot of them don&rsquo t even sit in Singapore. They are in Asean.&rdquo They sign on as their countries only have &ldquo legacy&rdquo telco providers that cannot provide the same level of services, he shared.

 

The benefits also permeate StarHub&rsquo s enterprise business, which Eapen views as a 50-50 contributor to revenue. Cloudification allowed it to deploy a secure autonomous cloud network for smart city projects, including JTC&rsquo s Punggol Digital District.

 

Such a network can overcome existing pain points, such as the lack of computing power for analytics, an absence of true multi-cloud options to not be overly reliant on one cloud system, and a dearth of options to avoid overspending on cloud security, he said. &ldquo This is a very different world from this sort of clunky telco, systems-integrator use cases.&rdquo

 

The dividend picture

The way Eapen sees it, StarHub is poised for strong profitability growth from this year onwards.

While the company can maintain strong dividends due to its strong free cash flow and low debt &ndash its net debt to Ebitda is about 1.4 times versus the regional telco average of 2.5 times &ndash Eapen wants it to be seen as more than a dividend play. 

 

Although telcos are seen as very stable businesses, and investors do buy it for the dividend yield, Eapen said: &ldquo We view ourselves as a total shareholder return company. We&rsquo re not just a dividend company.&rdquo

 

Eapen even believes that StarHub is under-leveraged, and said that he is contemplating moving its net debt to Ebitda closer to the telco average of 2.5 times over the long term. The current low leverage &ldquo gives us a lot of firepower for acquisitions, which we&rsquo re focused on&rdquo , he added.

 

On this note, there has been talk that StarHub could buy over one of the telcos for some years now.

 

The proposition was met with a tight-lipped Eapen, who would only say: &ldquo We have a high degree of credibility and confidence. I think we&rsquo ve executed quite well. Our mobile revenue market share has expanded&hellip We have low leverage and funding firepower. 

 

&ldquo So while I can&rsquo t comment on the specifics of any consolidation, I would say we are well-positioned.&rdquo