• We model S$175m in savings over next three years, lifting FY19F/20F/21F earnings by 20%/35%/55%.
• Earnings to stabilise despite weak mobile and Pay TV.
• Earnings may resume growth from 2021F onwards.
• Upgrade to BUY with revised Target Price of S$2.45.

Upgrade to BUY on Cost-saving Initiatives

StarHub has disclosed a target of S$210m in cost savings over a three-year period from 2019. Staff reduction and cost reductions via procurement, leasing, repairs and maintenance and sales and distribution will be the key drivers. We conservatively model S$175m in savings after factoring in costs related to growth initiatives, with savings of S$40m/S$55m/S$80m in FY19F/20F/21F.

StarHub’s earnings may stabilise now and resume growth from 2021F onwards as we see sector consolidation in 2-3 years due to a weak business case for TPG. 

Where We Differ

• We expect a sharp cut in dividends in FY19F to a more sustainable level.
• StarHub has committed to pay out S$277m in annual dividends in FY18. However, we project 80% payout ratio from FY19F onwards versus 100% assumption earlier as StarHub should, ideally, retain some earnings to invest in new business opportunities. 

Potential Catalyst

Commercial success of MyRepublic and/or news on TPG’s launch. Execution effectiveness of MyRepublic’s partnership with StarHub and further delay in TPG’s commercial launch, from late 2018 to early 2019, could benefit the stock. 

Valuation

• Upgrade to BUY with a higher Target Price of S$2.45.
• We deploy DFC (WACC 7%, terminal growth 0.5%) to drive our Target Price and project FY19F dividend yield of 5.8%. StarHub is likely to see a stable EBITDA over FY17A-20F (versus -4% earlier) due to the cost savings.

Key Risks to Our View

Bear-case valuation is S$1.75 if TPG causes severe disruption. StarHub could see a 3% drop in FY19F EBITDA under this scenario vs our base case of 1% growth.

TPG delaying the launch by 12 months or more may lead to bull-case valuation of S$2.70. StarHub could see a 5% rise in FY19F EBITDA under this scenario vs our base case of 1% growth. 

What's New - Big Area of Cost Savings

Staff reduction may lead to an estimated S$30-35m in annual savings and almost S$100m in total savings over the next three years.

• Total staff expenses stood at S$282m in 2017. Workforce reductions will primarily affect backroom functions, with approximately 300 full-time employees out of an estimated 2,500.
• We estimate almost S$30-35m in annual savings from staff reduction. There will be one-off cost of S$25m in FY18.

We model operating lease cost to drop by an estimated S$20-25m annually from 2021 onwards.

• Total operating lease cost, including rental of various buildings, stood at S$129m in 2017. The major item here could be cost savings from renewal of lease for the horizontal network.

Sales & distribution cost savings could be ~S$20-30m annually in our estimates.

• Total sales & distribution cost stood at S$122m in 2017. We think with the use of digital chat as a customer care tool, there could be 30-40% savings in the customer care costs.
• Investing in digital distribution channels such as online shops and effective offline-to-online model, coupled with the use of data analytics, could lead to a 10- 15% reduction in distribution costs in our estimate.

Source: DBS Research - 04 Oct 2018