• StarHub (SGX:CC3)’s 1H22 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.
• SingTel (SGX:Z74) is our sector pick.

DARE+ Cost to Soar in 2H

• StarHub's 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 S$0.025 dividend in 1H22 puts it on track to meet the S$0.05 per 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 q-o-q (1H22: +3.8%) and would have ticked-up 3% q-o-q (+5.5% y-o-y) if not for a one-off accounting standard adjustment on handset subsidies. StarHub's management highlighted that while roaming revenue is recovering, it has yet to revert to pre-pandemic levels. 5G subscribers 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% y-o-y in 2Q22 (1H22: +4.7%) on higher subscribers and subscription revenue with ARPU (reclassified in 1Q22 to include OTT) steady q-o-q. We see the positive momentum flowing into 2H22, supported by English Premier League (EPL) content.
  • Elsewhere, broadband revenue jumped 25% q-o-q (+33% y-o-y) with maiden quarter contribution from MyRepublic (MR) (ex. MR: +0.6% q-o-q, +6.6% y-o-y).

Enterprise Up 17% in 1H22 (+13% Q-o-q)

• 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% y-o-y (31% of enterprise revenue), more than offsetting legacy (network solutions) revenue decline (1H22: -3.4%).

StarHub - Earnings Forecast and Recommendation

• We see a significant scale up in 2H22 opex and capex with StarHub's management reaffirming its guidance. We adjust FY22F-24F core earnings forecast for StarHub 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.
• Stay NEUTRAL on StarHub with new DCF-derived S$1.20 target price from S$1.29, 5% downside, 4% dividend yield. Our target price for StarHub has baked in a 4% ESG premium.

• 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 Invest Research - 5 Aug 2022