• Acquiring a 50.1% stake in MyRepublic’s (MR) Singapore Broadband business for S$70.8mn. And extending a S$74.2mn 3-year loan to MR Holding company.
• The acquisition will further consolidate the broadband market into a tighter oligopoly. Synergies include network cost savings and cross-selling into MR’s higher ARPU customer base.
• We are neutral on the transaction. A large benefit is to consolidate or even remove a potential competitive threat in the marketplace. The acquisition is EPS accretive and valued at FYJun21 EV/EBITDA of 8.0x and 13.6x PE. Our NEUTRAL recommendation and estimates are unchanged pending completion of the transaction in December 2021.

Recent Events

1. StarHub will invest S$70.8mn for a 50.1% stake. A further deferred consideration of up to S$92mn when certain financial matrices are met.
2. StarHub will extend a 3-year loan (extendable another 2-years) of S$74.2mn to MyRepublic Holding Company (MR HoldCo).
3. The FY21 NAV of MyRepublic Singapore (or target company) is negative S$1.2mn, net debt of S$7.2mn, EBITDA of S$18.58mn and PATMI of S$10.4mn.

 Our View

The Positives

+ Consolidating and avoiding any potential threat.  StarHub’s broadband market share will rise 6% points to 40%. A tad below leader SingTel’s 43%. The transaction will further consolidate the market into effectively two major operators with at least 80% share. Another benefit is the possible avoidance of a better funded shareholder of MR that could price disrupt the market.

+ Cost and revenue synergies. The cost synergies will come from sharing of network infrastructure cost and capital expenditure. StarHub can drive more products such as cloud computing and OTT into MR’s higher ARPU consumer customer base. MR also has SME customers where StarHub’s enterprise solution may become an attractive value add.

+ Financially accretive acquisition. The acquisition will raise StarHub historical FY20 EPS by 3.8% to almost 9 cents. EBITDA will also improve by around 3.3%.

The Negatives

– Not entirely cheap, for now. The historical EV/EBITDA and PE ratio of the acquisition are 8.0x* and 13.8x** respectively. It is above our target valuations of StarHub but considered fair once the potential synergies materialise.

– Additional risk from the transaction. The transaction includes a S$74.2mn loan to MR Holdco backed by security packages (undisclosed) and interest-bearing.

*Market cap. of S$141.3mn plus net debt of S$7.3mn and EBITDA S$18.5mn

** Market cap. of S$141.3mn and PATMI of S$10.4mn.

Maintain NEUTRAL and TP of S$1.24

Our valuation is based on regional peers’ 6x FY21e EV/EBITDA. StarHub is paying 4% dividend yields with earnings upside from roaming revenue if international borders re-open.

Source: Phillip Capital Research - 27 Sep 2021