DBS Group Research analyst Sachin Mittal has kept his “buy” call on StarHub as the telco’s Dare+ expenses are coming to an end.
“Meaningful realisation will start from FY2025 onwards, once costs taper off,” Mittal writes in his April 22 report.
StarHub has lowered its total transformation costs to $270 million with 90% – or $243 million – of the transformation to be completed by the FY2024.
“We expect transformation costs of $54 million/$27 million in FY2024/FY2025 (60% of capital expenditure or capex and 40% operating expenditure or opex),” says the analyst.
“This transformation has also led to a lower maintenance capex over the last three years, leading to a drop in depreciation and finance costs, boosting earnings growth,” he adds. “We project an 8% earnings compound annual growth rate (CAGR) over FY2023 – FY2025, coupled with yield of over 6%. Furthermore, its share buyback plan provides downside protection to the stock.”
To Mittal, StarHub’s cybersecurity business has been largely ignored by the market. Excluding D’Crypt, the business has been profitable. It also has the potential to grow at a CAGR of 20% led by Ensign, he notes. D’Crypt was acquired by Singapore Technologies Engineering (ST Engineering) for $67.5 million in December 2023.
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The cybersecurity business is also a potential candidate for a public listing, given that it achieved operating profit breakeven in FY2023. “We expect the cybersecurity business to go public by FY2024/FY2025.”
Based on Mittal’s FY2024 revenue estimates, StarHub’s cybersecurity business could fetch 23 cents to 35 cents per share with a mid-point of 29 cents per share. The listing could also boost the telco’s share price by 20% to 30%.
“We have assumed 2 times – 3 times price-to-revenue for Ensign in FY2024. The enterprise value of Ensign is expected to be $0.73 billion - $1.1 billion. StarHub can claim $406 million - $610 million for its 55.73% stake, which equates to 20% - 30% of StarHub’s market capitalisation of $2.1 billion,” the analyst explains.
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In his report, Mittal has increased his target price estimate to $1.54 from $1.25 previously. The new target price is based on a separate valuation for Ensign and is due to a 3% and 4% revision to StarHub’s earnings for the FY2024 and FY2025 respectively.
“We use [a] discounted cash flow (DCF) methodology with weighted average cost of capital (WACC) of 8.2% (prev 8.5%) on lower beta and terminal growth rate assumption of 0% to arrive at $1.25 per share excluding Ensign,” he writes.
“We believe StarHub should re-rate from 13 times FY2024 price-to-earnings ratio (P/E) to 17 times, still lower than its last five-year average of 18 times,” he adds.
As at 1.04pm, shares in StarHub are trading 3 cents higher or 2.52% up at $1.22.
