• We have seen an improvement in execution at StarHub since Peter K took over the helm as CEO with effect from 9 Jul 18. Our channel checks suggest that customer service has improved. The permutation of possible scenarios has increased because: TPG Singapore will be spun off, and Keppel and SPH could gain majority control of M1 through general offer at S$2.06.
• The valuation discount imposed on StarHub should be rightfully reduced.
• Maintain BUY and lift target price to S$2.10.

What’s New

New CEO injects new vigour.

StarHub’s new CEO Peter Kaliaropoulos (Peter K) has over 35 years of experience with senior leadership experience at Zain (Saudi Arabia), BT (Asia Pacific), Telstra (Australia & USA), Optus (Australia), Clear (New Zealand), Batelco (Middle East) and Ooredoo (Kuwait). Execution has improved since Peter K took over the helm as CEO with effect from 9 Jul 18.

Within two months of his appointment, StarHub has scaled up in cyber security with the merger of Accel Systems & Technologies with Temasek’s Quann World to form Ensign InfoSecurity.

Differentiating through better customer service.

StarHub plans to differentiate itself by delivering high service standards to delight its customers. It has integrated customer service touch-points like retail centres and My StarHub app. StarHub seeks feedback by sending customers a simple SMS, with just four questions, to rate the service they have just received. Our channel checks suggest that customer service has improved.

StarHub benefits from change in industry dynamics.

In the past, we saw StarHub as the acquirer driving consolidation of the industry, from four to three mobile players in 2-3 years. Our thesis has changed with two recent developments:

• Spin-off of TPG Singapore before TPG VHA merger. TPG Telecom intends to undertake a separation of its Singapore mobile business to its existing shareholders through an in-specie distribution before the implementation of merger between TPG and Vodafone Hutchison Australia (VHA). TPG Singapore would become a separate standalone company, presumably listed on ASX. TPG Singapore could be open to an M&A and should be seen as a takeover target.
• M1 could become an acquirer. Konnectivity Pte Ltd, a JV between Keppel Corporation (Keppel) and Singapore Press Holdings (SPH), has made a pre- conditional voluntary general offer for M1 at S$2.06. In the past, M1 was seen as a takeover target with a fragmented shareholding structure. If Keppel and SPH are successful in their efforts to gain majority control of M1, M1 would no longer be a takeover target. Instead, M1 could be positioned as an acquirer during the industry consolidation due to support from strong shareholders.

Stock Impact

Benefitting from change in industry dynamics.

In the past, the most likely scenario was for StarHub to acquire M1 during industry consolidation in 2-3 years. The permutation of possible scenarios has increased. We believe industry consolidation could involve:

• StarHub acquiring TPG Singapore,
• M1 acquiring TPG Singapore, or
• StarHub and M1 in merger of equals.

The valuation discount imposed on StarHub should be reduced, given that either StarHub or M1 could be the acquirer during an industry consolidation in 2-3 years.

We have lowered the beta for StarHub from 1.25x to 1.1x, which reduces our cost of equity from 9.0% to 8.25%. We lift our target price higher from S$1.92 to S$2.10 accordingly.

Presumptuous to assume takeover offer for StarHub.

At the offer price of S$2.06, M1 is valued at EV/EBITDA of 7.2x based on its financial performance in 2018F. 

StarHub would be valued at S$2.15 if we apply the same 2018F EV/EBITDA of 7.2x. However, investors should not be presumptuous to assume another general offer is forthcoming.

Earnings Revision / Risk

• We maintain our existing earnings forecasts.

Valuation / Recommendation

• Maintain BUY. Our target price of S$2.10 is based on DCF (COE: 8.25% and terminal growth: 1.0%).

Share Price Catalyst

• Dividend yield is attractive at 8.5% for 2018, 6.4% for 2019 and 5.3% for 2020.
• M1 and StarHub collaborating on network sharing.

Source: UOB Kay Hian Research - 01 Oct 2018