UOB Kay Hian Tuesday, 13 May 2025 StarHub (STH SP): Navigating Transformation Amidst Pricing Competition Investment Thesis StarHub faces stiff domestic pricing competition in its mobile segment, but enterprise businesses are expected to drive growth in 2025. Despite an attractive 2025 dividend yield of 5.8%, the stock is fairly valued at current levels. Maintain HOLD rating with a target price of S\$1.26. [[1]] Company Overview StarHub is a telecommunications company offering mobile, pay-TV, broadband, and ICT solutions in Singapore. [[1]] Key data: GICS sector: Communication Services Bloomberg ticker: STH SP Shares issued: 1,721.8 million Market cap: S\$2,014.5 million (US\$1,552.1 million) 3-month average daily turnover: US\$1.0 million 52-week high/low: S\$1.29/S\$1.10 Major Shareholders: Temasek Holdings Pte Ltd: 56.4% NTT Communications: 10.0% FY25 NAV/Share: S\$0.37 FY25 Net Debt/Share: S\$0.21 1Q25 Results: Soft Performance in Line with Expectations StarHub reported a 1.1% year-on-year increase in service revenue but a 20.7% year-on-year decrease in PATMI. [[1], [2]] The decline in PATMI was due to higher operating and transformative costs. [[1], [2]] Strong customer additions were seen, but the mobile segment faced pricing pressures. [[1], [2]] Financial Performance Breakdown Key financial results for 1Q25: Mobile: Revenue of S\$139.2 million, down 4.1% yoy due to stiff pricing competition. [[2]] Entertainment: Revenue of S\$50.4 million, down 7.9% yoy. [[2]] Residential Broadband: Revenue of S\$64.4 million, up 4.9% yoy, driven by migration to higher speed plans. [[2]] Enterprise: Revenue of S\$210.0 million, up 1.9% yoy, driven by managed services growth. [[2]] Sales of Equipment/Others: Revenue of S\$76.5 million, down 10.9% yoy. [[2], [3]] Total Revenue: S\$540.5 million, down 0.9% yoy. [[2], [3]] EBITDA: S\$100.2 million, down 7.6% yoy, dragged by higher costs. [[2], [3]] EBITDA Margin: 18.5%, a decrease of 1.3 percentage points yoy. [[2], [3]] Service Revenue: S\$464.0 million, up 1.1% yoy. [[2], [3]] Core Service EBITDA: S\$95.5 million, down 5.7% yoy. [[2], [3]] Core PATMI: S\$31.8 million, down 20.7% yoy. [[2], [3]] Subscribers: 2,378,000, up 10.4% yoy. [[2], [3]] Mobile ARPU: S\$21, down 8.7% yoy. [[2], [3]] Broadband ARPU: S\$36, up 9.1% yoy. [[2], [3]] Analysis of 1Q25 Performance Overall revenue decreased by 0.9% year-on-year, and PATMI decreased by 20.7% year-on-year. [[3]] The results align with full-year forecasts, with PATMI forming 21.5% of expectations. [[3]] Lower revenue from mobile, entertainment, and cybersecurity segments contributed to the PATMI decline. [[3]] Higher operating and depreciation costs also impacted PATMI. [[3]] Service revenue increased slightly, driven by broadband and regional enterprise segments. [[3]] Service EBITDA was lower due to outsourcing and transformation-related costs, including DARE+ investments. [[3]] Margins and DARE+ Program The DARE+ program is expected to conclude by the end of 1H25. [[3], [4]] The remaining 10% of DARE+ investments (S\$20m-25m) will be expensed by end-1H25, potentially supporting margins. [[3], [4]] The upcoming S\$282m spectrum payment, due by end-2Q25, and decommissioning costs in 4Q25 are expected to keep overall margins muted in 2025. [[3], [4]] Key Financials Summary of key financials from 2023 to 2027F: Net Turnover: Increasing from S\$2,373m in 2023 to S\$2,589m in 2027F. [[4]] EBITDA: Relatively stable around S\$435m. [[4]] Operating Profit: Increasing from S\$226m in 2023 to S\$233m in 2027F. [[4]] Net Profit (adj.): Increasing from S\$150m in 2023 to S\$183m in 2027F. [[4]] EPS: Increasing from 8.7 S cents in 2023 to 10.6 S cents in 2027F. [[4]] Dividend Yield: Increasing from 5.7% in 2023 to 7.2% in 2027F. [[4]] 1Q25 Key Performance Guidance Service Revenue: Managed services grew by 20.2% yoy and are expected to drive growth in 2025. [[5]] Service EBITDA: Decreased by 5.7% yoy, underperforming guidance. [[5]] Capex Commitment: Expected to be within 9%-11% of total revenue. [[5]] Dividend/Share: Higher of 6 S cents or 80% PATMI payout. [[5]] 2025 Outlook StarHub is on track to meet its 2025 service revenue guidance, driven by managed services. [[5]] Service EBITDA underperformed due to higher operating and transformative costs. [[5]] Ongoing costs to decommission legacy systems and harvest DARE+ benefits are expected to weigh on EBITDA growth. [[5]] Full benefits of DARE+ are expected to materialize in 2026. [[5]] The group is unlikely to exceed the 2025 capex commitment guidance, excluding the S\$282m spectrum payment. [[5], [6]] Expectations remain for a 2025 total dividend of around 6.8 S cents/share, implying an 80% PATMI payout and a 5.8% dividend yield. [[5], [6]] Stock Impact Mobile: Revenue decreased by 4.1% yoy due to lower data roaming, value-added services, and excess data usage revenues. [[6]] Mobile subscribers grew by 46,000 qoq and 224,000 yoy, driven by giga! and Mobile Virtual Network Operators (MVNO) brands. [[6]] Blended mobile ARPU fell to S\$21/month due to stiff domestic pricing competition. [[6]] Average monthly churn rate increased slightly to 1.2%. [[6]] Broadband: Revenue grew by 4.9% yoy due to higher subscription revenue from higher speed plans. [[6], [7]] ARPU stabilized at S\$36/month despite a slight decrease in total subscribers. [[6], [7]] Average monthly churn rate remained low at 0.8%. [[6], [7]] Regional Enterprise Business: Revenue increased by 10.1% yoy, driven by managed services and enterprise connectivity. [[6], [7]] Cybersecurity Services: Revenue decreased by 13.1% yoy due to the timing of project recognition; strong orderbook expected to drive future growth. [[7]] Earnings Revision No changes were made to the 2025-27 PATMI estimates. [[7]] Valuation and Recommendation Maintain HOLD rating with a DCF-based target price of S\$1.26 (COE: 8.4%; terminal growth: 1%). [[7]] The stock is trading at 6x 2025F EV/EBITDA, -1 standard deviation to its long-term average mean EV/EBITDA. [[7]] A declining consumer segment, muted margins, and minimal earnings growth may cap share price performance in 2025. [[7]] Recommend investors wait for better entry points. [[7]] Potential Catalysts Market consolidation – exit of MNVOs. [[8]] Faster-than-expected 5G adoption and new business cases in Singapore. [[8]] Faster-than-expected realization of DARE+ initiatives benefits. [[8]] Key Financial Tables PROFIT & LOSS Year to 31 Dec (S\$m) 2024 2025F 2026F 2027F Net turnover 2,367.7 2,428.6 2,506.1 2,588.7 EBITDA 437.6 434.8 430.9 432.6 Deprec. & amort. 213.3 238.4 214.4 199.8 EBIT 224.3 196.4 216.6 232.8 Associate contributions 4.3 0.0 0.0 0.0 Net interest income/(expense) (23.3) (16.1) (10.3) (8.7) Pre-tax profit 205.3 180.3 206.3 224.0 Tax (37.2) (32.7) (37.4) (40.6) Minorities (7.6) 0.0 0.0 0.0 Net profit 160.5 147.6 168.9 183.4 Net profit (adj.) 160.5 147.6 168.9 183.4 BALANCE SHEET Year to 31 Dec (S\$m) 2024 2025F 2026F 2027F Fixed assets 634.5 845.4 806.4 774.9 Other LT assets 959.5 959.5 959.5 959.5 Cash/ST investment 539.2 382.2 493.5 602.7 Other current assets 987.4 996.0 1,007.5 1,019.7 Total assets 3,120.6 3,183.1 3,266.9 3,356.8 ST debt 40.0 31.8 31.8 31.8 Other current liabilities 1,334.3 1,353.5 1,385.4 1,419.9 LT debt 687.6 708.6 726.2 743.0 Other LT liabilities 291.6 291.6 291.6 291.6 Shareholders’ equity 607.9 638.3 672.6 711.2 Minority interest 159.3 159.3 159.3 159.3 Total liabilities & equity 3,120.7 3,183.1 3,266.9 3,356.8 CASH FLOW Year to 31 Dec (S\$m) 2024 2025F 2026F 2027F Operating 361.3 412.7 414.0 414.3 Pre-tax profit 205.3 180.3 206.3 224.0 Tax (37.2) (32.7) (37.4) (40.6) Deprec. & amort. 213.3 238.4 214.4 199.8 Associates (4.3) 0.0 0.0 0.0 Working capital changes 32.9 10.6 20.4 22.3 Other operating cashflows (48.7) 16.1 10.3 8.7 Investing (101.9) (428.6) (155.7) (146.3) Capex (101.9) (428.6) (155.7) (146.3) Proceeds from sale of assets 0.0 0.0 0.0 0.0 Others 0.0 0.0 0.0 0.0 Financing (221.8) (141.3) (146.9) (158.7) Dividend payments (123.7) (117.3) (134.5) (144.9) Issue of shares 0.0 0.0 0.0 0.0 Proceeds from borrowings (433.4) 12.8 17.5 16.8 Others/interest paid 335.3 (36.8) (30.0) (30.7) Net cash inflow (outflow) 37.6 (157.1) 111.3 109.2 Beginning cash & cash equivalent 497.9 539.2 382.2 493.5 Changes due to forex impact 3.7 0.1 0.0 0.0 Ending cash & cash equivalent 539.2 382.2 493.5 602.7 KEY METRICS Year to 31 Dec (%) 2024 2025F 2026F 2027F Profitability EBITDA margin 18.5 17.9 17.2 16.7 Pre-tax margin 8.7 7.4 8.2 8.7 Net margin 6.8 6.1 6.7 7.1 ROA 5.2 4.7 5.2 5.5 ROE 27.3 23.7 25.8 26.5 Growth Turnover (0.2) 2.6 3.2 3.3 EBITDA 0.1 (0.6) (0.9) 0.4 Pre-tax profit 4.4 (12.2) 14.4 8.6 Net profit 7.2 (8.0) 14.4 8.6 Net profit (adj.) 7.2 (8.0) 14.4 8.6 EPS 7.4 (8.0) 14.4 8.6 Leverage Debt to total capital 48.7 48.1 47.7 47.1 Debt to equity 119.7 116.0 112.7 108.9 Net debt/(cash) to equity 31.0 56.1 39.3 24.2 Interest cover (x) 18.8 27.0 42.0 49.5
