StarHub to drive growth through bundled services, digitalisation of operations

A SHIFT towards "Infinity Play" products and the digitalisation of its operations are expected to drive StarHub's CC3 cost savings and gross profit growth in the coming years, the telco's management said at a briefing on Monday (Nov 22). (see amendment note)

On its Investor Day 2021 call, StarHub unveiled Dare+, the next stage in its transformation programme which began in 2018 to optimise costs, that is expected to save the company S$280 million and generate an additional S$220 million in gross profit cumulatively between FY2022 and FY2026.

StarHub chief financial officer Dennis Chia noted that with the Dare+ initiative, the company expects to grow its dividends over the next few years. The telco has committed to paying at least 5 Singapore cents or 80 per cent of its net profit attributable to shareholders in dividends, adjusted for one-off, non-recurring items.

"We do take into consideration, a 3-year time horizon, in terms of the sustainability of our dividends when we guide for the dividends as well," he said, adding that the company will provide guidance on the dividend policy for the upcoming financial year at its next financial results announcement.

In comparison to past payouts, StarHub's dividends remain low. Between 2010 and 2016, the company paid out dividends of S$0.20 per share annually, before declining to S$0.0475 per share in 2020.

The Dare+ programme will focus on delivering sustainable revenue growth and potential growth in dividends with higher product margins from the introduction of new 5G products and solutions.

Tactical initiatives, new growth initiatives and the rollout of 5G Internet-of-Things (IoT) products and solutions are also expected to contribute to higher earnings before interest, taxes, depreciation and amortisation (Ebitda).

Operating expenditure, as well as fixed costs as a percentage of revenue and total cost, will also see declines as the company looks to adopt more efficient digital platforms and evolve its operating and cost models.

In unveiling its Dare+ programme, StarHub expects to see 70 per cent of gross profit growth come from consumer "Infinity Play" and adjacent businesses, as well as next-generation 5G enterprise products and solutions.

Under the programme, it aims to shift customers from its current quad play set of services to a set of connectivity, over-the-top (OTT) streaming entertainment, cloud gaming and digital solutions.

Chief executive officer Nikhil Eapen noted that the company has been successful in driving growth in average revenue per user (ARPU) for its broadband segment.

"We're giving customers OTT platforms, cloud gaming platforms and experiences, and that quite naturally drives their consumption, their desire for higher-value packages," he said, adding that bundled services have also driven growth in users' adoption of 5G and mobile ARPU.

Citi analyst Arthur Pineda also liked that as more alternative mass-market 5G handsets are made available, 5G adoption will continue to drive mobile revenue growth, in addition to resuming roaming charges as the Covid-19 pandemic recedes and borders reopen. He maintains "buy" on StarHub with a target price of S$2.00.

Furthermore, 30 per cent of gross profit growth will come from the company's ongoing IT transformation as well as optimisations and simplifications to its customer service operations.

With projected cost savings of S$280 million over the 5 years, StarHub plans to allocate its future investments - 45 per cent to growth areas, 32 per cent to IT and cost optimisation, and 23 per cent to its network.

Taking its lead from Giga, its digital mobile virtual network operator brand, StarHub will begin improving its app experience to create what it calls a super-app that will give customers access to all of its "Infinity Play" products.

"You can imagine that the cost of that engagement, and the cost of servicing our customers, and the cost of acquiring customers, is very different from what it is today in a positive direction," Eapen said.

DBS analyst Sachin Mittal said that it was "commendable" that the company is now focused on gross profit growth, after competition in the mobile space and Covid-19 chipped away at its topline growth. He also liked that the "Infinity Play" products will likely continue to boost the company's topline. He also maintained "buy" on the company with a S$1.60 target price.

"The idea is to engage more and more people, and StarHub can do this because they have partnerships with the content providers in which there's minimal cost even if the subscriber doesn't pay in revenue," he said, adding that these partnerships will likely remain as content and service providers like Disney and Nvidia take advantage of StarHub's network of customers to target higher-end users who are already using greater broadband bandwidth and 5G networks.

Additionally, Chia noted that under the Dare+ programme, the company could redeploy its call centre agents towards proactively reaching out to customers with technical issues instead of just taking calls to resolve their issues when they happen.

Depending on how quickly customers shift towards adopting these digital tools, the telco will also look to reduce its retail footprint over time to drive further cost savings.

"As we help our customers get used to the digital model, which is something that we believe is the trend of the future, then our retail footprint can actually come down," Chia said.

Still, Dan Baker, Morningstar senior equity analyst of Asia telecom and technology, said that StarHub's competitors are likely working on similar improvements, so such cost reductions may be needed just to keep up.

The company further noted that cost synergies and further upselling and cross-selling opportunities will be derived from its recent acquisitions, such as through its proposed acquisition of a 50.1 per cent stake in MyRepublic that was previously announced in September this year.

The Infocomm Media Development Authority (IMDA) had issued a consultation paper on Nov 19 about the proposed acquisition, within which StarHub and MyRepublic noted that StarHub will remain the No 2 player by number of subscribers post-acquisition, and that the broadband market is "hyper-competitive with many competing operators and very low barriers to entry".

The public and the industry can send their comments on the proposed acquisition to IMDA by noon on Dec 13.

Citi's Pineda noted that StarHub's mergers and acquisitions in cybersecurity company Ensign and ICT services companies JOS and Strateq have been profit accretive so far, and further acquisitions could provide further upside to the company's 5-year target.

"StarHub's M&A push has allowed it to drive growth into enterprise which in turn reduces dependency on traditional telco services as well as diversify its geographic footprint," he said.

However, Mittal noted that it will take some time before the effects of the company's investments can be observed. Increased operating expenditure will likely be needed in the immediate future for some of StarHub's initiatives, such as its shift towards cloud-based services from its current legacy systems.

StarHub shares closed up S$0.01 or 0.8 per cent at S$1.29 on Monday.

Amendment note: An earlier version of this article incorrectly stated that the company had guided for gross profit margin growth instead of gross profit growth. The article above has been revised to reflect this.

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