• Stay NEUTRAL, new DCF-derived SGD1.20 TP from SGD1.29, 5% downside, 4% dividend yield. StarHub’s results fell short of our estimates. While the positive revenue trends were sustained, the expected surge in opex and capex related to its transformation initiatives (DARE+) will weigh heavily on its bottomline. Valuations are reflective of the earnings malaise with the stock’s risk-reward profile looking balanced. Our TP has baked in a 4% ESG premium. Singtel (ST SP, BUY, TP: SGD3.55) is our sector pick.

• DARE+ cost to soar in 2H. 1H22 results broadly met consensus’ (60%) but trailed our estimates (45%), with opex and capex related to DARE+ expected to surge in 2H22. Service EBITDA and core PAT fell 7.8% and 10.3% on 8.7% topline growth, mainly from higher costs associated with the regional ICT businesses. A 2.5 cents DPS puts it on track to meet the 5 cents/share or 80% payout guidance, whichever is higher.

• Mobile distorted by one-off, entertainment and broadband moving in the right direction. 1H22 service revenue grew 11.7%, led mainly by broadband (+21.5%), and enterprise (+16.9%). Mobile revenue was flat QoQ (1H22: +3.8%) and would have ticked-up 3% QoQ (+5.5% YoY) if not for a one-off accounting standard adjustment on handset subsidies. Management highlighted that while roaming revenue is recovering, it has yet to revert to pre-pandemic levels. 5G subs base continued to trend higher (2Q22: not disclosed, 1Q22: >400k), at >20% of overall subs base. Entertainment revenue (includes over-the-top (OTT) services) rose 5.4% YoY in 2Q22 (1H22: +4.7%) on higher subs and subscription revenue with ARPU (reclassified in 1Q22 to include OTT) steady QoQ. We see the positive momentum flowing into 2H22, supported by English Premier League (EPL) content. Elsewhere, broadband revenue jumped 25% QoQ (+33% YoY) with maiden quarter contribution from MyRepublic (MR) (ex. MR: +0.6% QoQ, +6.6% YoY).

• Enterprise up 17% in 1H22 (+13% QoQ). Regional ICT businesses’ (Strateq, JOS (SG), JOS Malaysia) revenue (24% of enterprise revenue) more than doubled in 1H22 (QoQ: +5%) while cybersecurity (Ensign) revenue rose 4% YoY (31% of enterprise revenue), more than offsetting legacy (network solutions) revenue decline (1H22: -3.4%).

• Forecasts and risks. We see a significant scale up in 2H22 opex and capex with management reaffirming its guidance. We adjust FY22F-24F core earnings by –13.8%/-5.8%/-10.3% based on the latest opex run-rates (and to factor in the lumpy transformation expense and higher 5G wholesale costs. FY22F will still see acute earnings compression with outcomes from DARE+ expected from 2HFY23F. Key risks: Weaker-than-expected earnings, larger-than-expected opex and capex, and competition. Stronger- than-expected earnings present the key upside risk to our forecast.

Source: RHB Research - 5 Aug 2022