• Keep NEUTRAL and DCF-based SGD1.18 TP (6% downside), c.6% yield. StarHub’s results were broadly in line, with the enterprise segment being the key outperformer, masking the subdued mobile performance. While the multi-year transformation spend is set to ease post FY24F, the timing of benefits and positive earnings realisation remain uncertain, in our view. Our TP includes a 2% ESG premium.

• In line. 1Q24 results were broadly in line with core PAT (+9.3% QoQ, +3.7% YoY) forming 24% of our and consensus’ forecasts. Overall service revenue fell 11.4% QoQ (+1.3% YoY) owing to seasonality and the divestment of D’Crypt – a hardware developer for the defence industry – which was completed in Feb 2024. Excluding D’ Crypt, which is slightly earnings dilutive, service revenue would have risen 2% YoY.

• Mobile weak; broadband flat; enterprise aces. Mobile service revenue fell 5% YoY as higher take-up of SIM-only plans and lower excess data usage (higher data bundles) crimped ARPUs. Broadband revenue was flat but ARPU was marginally lower with the cessation of premiums, partially offset by the upselling of higher speed plans (5Gbps/10Gbps) on the industry-leading XGS-PON network. Enterprise continues to be the bright spot, up 8.3% YoY (ex-D’Crypt: +10.4% YoY) with cybersecurity revenue up 37% YoY owing to higher project recognition.

• DARE+ transformation spending to peak this year. Management is now guiding for north of SGG100m in transformation spending for FY24F (FY22- 23: c.SGD170m). This implies a cumulative spending of >SGD260m (since the investments started) by the year-end, or c.99% of the SGD270m targeted (spread over four years). The upside to this is the earlier realisation of benefits and positive outcomes, which we believe will materialise from 2H24.

• Other updates. Management is of the view that the successful execution of the transformation programme would position the group in a formidable footing, ahead of a potential industry consolidation. StarHub continues to see opportunities and is not ruling out enterprise-related M&As and/or partnerships. Management was quick to point out that it is not in the business of wholesaling data centre (DC) capacity to hyperscalers with its DC proposition aligned to the broader connectivity strategy (upselling and cross- selling of Infinity Cloud services). In addition to Singapore (mostly leased), the group also has a DC footprint in Malaysia (via Strateq).

• Key risks are higher-than-expected investments related to its transformation programme, execution delays, and competition.

Source: RHB Research - 15 May 2024