StarHub Earnings: Near-Term Profit Guidance Lifted but Revenue Reduced; Valuation Decreased

We reduce our fair value estimate for StarHub CC3 to SGD 1.20 from SGD 1.24 due to lower-than-expected revenue from enterprise services partially offset by lower forecast costs from Dare+. StarHub lowered full-year 2023 services revenue growth guidance to a midpoint of 4% from a midpoint of 9% previously, but lifted forecast services EBITDA margin to 22% from 20%, implying a slight lift in forecast 2023 EBITDA, but we see the lower revenue forecasts as slightly negative for earnings post-2023. Near-term EBITDA is partially a function of the level of Dare+ expenses included and the expected level of these expenses to be incurred in 2023 was reduced to SGD 120 million from SGD 155 million, due to cost rationalization and some delays in rollout. The total forecast cost of Dare+, currently estimated by management at SGD 310 million will likely be reduced, by around 8% to 10% on our estimates. Guided 2023 capital expenditure as a percentage of total revenue reduced to a midpoint of 12% from a midpoint of 14% previously due to reduced spending and some delays as outlined above.

We make no change to our narrow moat rating based on cost advantage and efficient scale, with the company continuing to earn returns above its cost of capital over the period from 2015 to 2022 of steadily declining profit. With a decrease in Dare+ spending post-2023 and an expected recovery in roaming revenue, we forecast ROIC to increase from 11% in 2022 to 16% in 2027 compared with a 7.9% WACC. Around SGD 106 million of investments in the Dare+ program (spread across both operating costs and capital expenditure) was spent prior to 2023 with around SGD 120 million to be spent in 2023 and 2024. The company is therefore banking on a turnaround in profitability and cash flow generation in 2024 and beyond. Only around SGD 30 million of the expected full-year 2023 Dare+ spending of SGD 120 million was spent in the first half year with only SGD 5 million of that incurred in the second quarter.