The analysts note that StarHub’s earnings overhang lay with its transformation programme which will “bloat” its capital expenditure and operating expenditure by some $310 million for FY2022 to FY2024.
However, 74% of these related costs are targeted to be spent by FY2022 and FY2023, leaving room for earnings expansion into FY2024 and FY2025 as related expenditures decline. StarHub estimates that around $80 million in incremental profit accretion from FY2021 levels ($150 million) by FY2026 owing to its digital transformation project and as “parallel redundancies” are eliminated.
They explain that the importance of earnings expansion and normalisation lies with its dividends with StarHub’s minimum 80% of earnings per share (EPS) pay out or 5 cents, whichever is higher.
Given rising earnings levels, Pineda and Hilado forecast StarHub’s dividends per share (DPS) to improve from 5 cents to 6 cents in FY2022 to FY2023 to 7 cents to 8 cents for FY2024 to FY2025, which represents a 7% to 8% yield as costs normalise with the completion of its transformation project.
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Meanwhile, they say that consolidation benefits within the telecommunication sector should not be discounted. “Both StarHub and SingTel management have optimistically commented on M&A prospects within Singapore. If this materialises, this may have accretive implications on StarHub’s value owing to potential cost savings or at the very least, market pricing repair.”
Even outside of M&A, StarHub has set out aggressive earnings growth targets at around $80 million profit accretion compared to pre-transformation levels by FY2026. Assuming it is only able to execute a fraction of these targets, the telco’s EPS upside remains healthy and above our current targets, say the analysts.
Still, they have trimmed their FY2024 to FY2025 EPS estimates by 5% to 9% purely to reflect an assumption of around $0.3 billion in 700MHz spectrum payments. This however could potentially be circumvented if StarHub is able to repurpose the spectrum from 4G to 5G and inject it into the 5G network JV with M1.
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Nonetheless, the Citi analysts’ upgrade as well as higher target price “conservatively” reflects average FY2024 yields at 1 standard deviation (s.d.) above StarHub’s long-term levels or 5.7%, anchored on a 7 cent DPS for FY2024. At a mean yield of 5%, this value further rises to $1.40.
They add that StarHub’s price-to-earnings ratio and enterprise value-to-ebitda multiples lie at 1 to 2 s.d. below its mean, while yields are 2 s.d. above its mean. “We see no risk to dividend pay-outs & yield growth with peak net debt/ebitda at 1.8x for FY2024, even after factoring in the assumption of around $0.3 billion in 700 band spectrum payments.”
Their upside risks include a faster realisation of cost savings, a rapid recovery in roaming revenues with the reopening of borders and faster migration of 4G subscribers to higher average revenue per user 5G plans. On the other hand, downside risks include higher-than-expected restructuring expenses, a material delay in cost savings benefits and “irrational competition” in the wireless or fixed broadband space.
As at 1.30pm, shares in StarHub were trading 1 cent or 0.99% up at $1.02, representing a dividend yield of 4.63%.
