Strong Q4 Performance In Cybersecurity Segment Will Strengthen Future Prospects

Key Takeaways

• StarHub's focus on cybersecurity and enterprise segments is driving revenue and net profit growth through improved efficiencies and ROI.
  
• Strong free cash flow and strategic acquisitions bolster financial health and future revenue, supported by a successful multi-brand mobile strategy.
  
• Persistent industry challenges and operational expenses, including spectrum costs and DARE+ transformation, create uncertainties in sustaining revenue growth and profitability for StarHub.

Catalysts

Provides communications, entertainment, and digital solutions for individuals and corporations in Singapore.

• StarHub anticipates a strong performance in the cybersecurity segment (Ensign) in Q4, which should contribute to revenue growth and maintain the full-year revenue forecast; this can boost earnings as the timing of revenue recognition impacts Q3 figures.
  
• The company is focusing on high-margin growth in enterprise segments, leveraging cost and operational efficiencies; these actions drive EBITDA and net profit growth by reducing depreciation and improving operational ROI.
  
• StarHub is operating with strong free cash flow, which is approximately 50% higher than net profit, reducing leverage and facilitating growth through acquisitions, which can further enhance revenue and earnings.
  
• StarHub's multi-brand, multi-market segmentation strategy in mobile is stabilizing revenue and increasing market share; the subsequent revenue impact from an added 55,000 subscribers should reflect more fully in future quarters, boosting revenue.
  
• The anticipated benefits from the DARE+ transformation program include significant incremental net profit after tax and cost efficiencies by 2025, suggesting a positive impact on net margins and overall earnings.

StarHub Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming StarHub's revenue will grow by 1.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.3% today to 4.0% in 3 years time.
• Analysts expect earnings to reach SGD 99.7 million (and earnings per share of SGD 0.07) by about April 2029, up from SGD 77.4 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting SGD126.5 million in earnings, and the most bearish expecting SGD81.6 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 21.7x on those 2029 earnings, down from 23.6x today. This future PE is lower than the current PE for the SG Wireless Telecom industry at 23.4x.
• Analysts expect the number of shares outstanding to grow by 0.12% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.91%, as per the Simply Wall St company report.

Risks

• Mobile revenue declined 5% year-on-year and faced quarter-on-quarter revenue attrition, indicating potential struggles in sustaining growth amidst competition, which could impact revenue.
  
• The cybersecurity business, Ensign, experienced revenue recognition timing issues, leading to a shortfall in Q3, which creates uncertainty around future earnings stability.
  
• Entertainment segment faced declines both quarter-on-quarter and year-on-year, affected by cord-cutting trends, impacting revenue and profitability.
  
• While robust free cash flow supports leverage reduction and growth, the ability to maintain or increase dividends could be tested with upcoming 700 MHz spectrum associated costs, impacting net margins.
  
• DARE+ transformation costs and delayed realization of cost efficiencies suggest ongoing operational expenses with uncertain returns on investment, impacting overall earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of SGD1.05 for StarHub based on their expectations of its future earnings growth, profit margins and other risk factors.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SGD1.3, and the most bearish reporting a price target of just SGD0.87.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be SGD2.5 billion, earnings will come to SGD99.7 million, and it would be trading on a PE ratio of 21.7x, assuming you use a discount rate of 5.9%.
• Given the current share price of SGD1.06, the analyst price target of SGD1.05 is 0.7% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.