• Stay NEUTRAL, higher SGD1.15 DCF TP from SGD1.11, 10% upside. StarHub’s 1H23 results were broadly in line. Notable highlights include: i) Project delays for the cybersecurity business, and ii) streamlining of the regional ICT business (JOS), which has manifested in the lower revenue growth guidance for FY23. We see a ramp-up in capex and opex in 2H23, as the group continues to harness positive outcomes from the DARE+ programme. Our TP has baked in a 4% ESG premium. Prefer Singtel (ST SP, BUY, TP: SGD3.40) for exposure to the sector.

• Opex set to ramp up in 2H23. 1H23 core earnings were up 26% YoY on stronger service revenue and steady EBITDA. While this made up 62% of our forecast (consensus: 69%), we expect a ramp-up in capex and opex in 2H23 from its DARE+ transformation programme.

• Service revenue up 8% in 1H23 with growth across all segments. Most segments displayed fairly routine growth with the exception of the enterprise segment, which saw YoY growth taper off to just 1.8% in 1H23 (FY22: +22% YoY). This was led by weaker regional ICT revenue, comprising of the JOS assets in Singapore and Malaysia, and Strateq. As part of the ongoing integration of its regional businesses, StarHub is adjusting the pipeline of projects – it is removing legacy low yielding segments and pushing new service propositions which would take time to convert to sales. Entertainment segment growth was flattish QoQ but rose YoY with incremental ARPU uplift (from the Premier League) offset by subs deletions.

• Recalibrated spending; guidance fine-tuned. Cost rationalisation and renegotiations have led to a lower guidance on investments for the transformation initiative of SGD120m for FY23F (previously SGD150m; FY22: SGD106m). This does not, however, change the aspirational outcomes and scope of the programme, which is to achieve SGD500m EBITDA breakeven in FY24F. To date, the group has invested SGD136m or c.44% of the targeted SGD310m in total investments to be made over three years (2022-2024). With only SGD30m invested in 1H23, we expect capex and opex to ramp up in 2H23. Due to project execution delays for cybersecurity and the rationalisation of JOS pipelines, StarHub has toned down its service revenue growth guidance for FY23F to 3-5% from 8-10% previously, while EBITDA margin (service revenue) guidance is lifted to 22% from 20%. Post the results call, we raise FY23-25F core earnings by 3-11%, mainly on account of stronger opex efficiencies.

• Downside risks are competition, weaker-than-expected earnings, and weaker-than-expected outcomes from its transformation programme. Upside risks are stronger-than-expected earnings and cost-savings from the DARE+ programme.

Source: RHB Research - 4 Aug 2023