It’s been a tough environment for StarHub Limited (SGX: CC3) this year.
The telco’s shares have lost more than a fifth of their value since the beginning of 2022 as net profit tumbled year on year for its fiscal 2022’s third quarter (3Q2022) even as revenue climbed.
Its peer Singtel (SGX: Z74) had turned in a better report card, with underlying net profit inching up year on year for its latest fiscal half-year.
Singtel’s share price has also risen by 13.3% year to date.
Investors, however, can have faith in StarHub advancing on its long-term initiatives built on its DARE+ transformation.
Unveiled a year ago during the telco’s Investor Day 2021, this bold initiative seeks to revitalise growth and result in cost savings for the group.
A year on, StarHub is reviewing its DARE+ progress and also pinning down its targets for 2023.
The good news is that the telco had raised its final dividend for fiscal 2021 (FY2021), so investors may be curious as to whether StarHub can raise its dividend once again next year.
A crucial DARE+ update
First off, StarHub provides a timely update on the first anniversary of its DARE+ goals.
The group’s savings target fell short of its S$35 million target as there were delays relating to IT and network transformations along with additional consumer launches during FY2022.
As a result, the telco only achieved savings of around S$21 million.
Next, StarHub also revised its investment target to S$310 million, up from S$270 million, with the additional money required for cloud infinity network transformation.
These new investments should mostly be made either next year or in 2024.
On the flip side, the group had achieved stronger-than-expected synergies of S$16 million year to date.
These comprised cross-selling and joint bids for the revenue side (S$10 million) and cost rationalisation and economies of scale that resulted in S$6 million of expenses being saved.
Product enhancements being rolled out
To accelerate revenue growth, StarHub is targeting to enhance three of its core products to derive higher customer satisfaction and ensure better stickiness.
For its Mobile division, it plans to expand its 5G network coverage and optimise performance.
On the Broadband side, the group will explore complementary devices to enhance performance while also improving router and network performance.
Finally, for the Entertainment division, the telco intends to roll out first-in-market Premier League digital features and promote hybrid TV+ adoption.
These moves will take time and money to execute, so investors need the patience to see the fruits of StarHub’s labour.
Laying down 2023’s priorities
As we head into 2023, StarHub is laying the groundwork for its priorities as it seizes opportunities to grow in selected areas.
First off, the telco plans to tap into the tourism recovery for its roaming and prepaid segment.
Underpinning this recovery is the release of its updated app platform which should see increased migration to digital sales and services.
Next, StarHub will address customers’ needs to strengthen its core business lines and deliver a comprehensive suite of services that will exceed expectations.
This customer angle also involves a growing ecosystem of strategic partners that can help the group to move up the value chain.
For its cybersecurity segment, StarHub plans to pursue larger, complex projects with higher margins that can bring in recurring income streams.
The division will also expand regionally and enhance its capabilities by tapping into analytics, artificial intelligence and machine learning to increase productivity and minimise human error.
Finally, StarHub has ambitious plans for its regional ICT services division.
The segment will pursue opportunities regionally beyond Malaysia while converting more fixed costs to variable costs to achieve higher margins.
It’s a lofty set of objectives that StarHub has come up with, but we will now have a yardstick to judge the group’s performance moving forward.
A position of financial strength
Growth initiatives are great, but they cost money to execute.
Naturally, investors may question if the telco has the resources and financial finesse to carry out these plans.
The group generated a lower free cash flow of S$115 million for 9M2022 as higher capital expenditures ate up more cash.
However, interest cover remained healthy at 9.9 times as of 30 September and StarHub had S$489 million of cash along with S$700 million in undrawn debt facilities.
Elsewhere, costs have been rising, with occupancy expenses more than doubling year on year to S$38.4 million and staff costs jumping nearly 20% year on year to S$253.2 million.
Importantly, StarHub has committed to paying out 80% of its net profit excluding one-off items and targets steady dividend growth through its DARE+ initiatives.
Capital expenditure has been pushed to FY2023 and the telco is also working on a slew of growth initiatives.
Coupled with rising inflation, there is a high chance that StarHub may pause its dividend increase until more clarity emerges on financial and margin growth.
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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.