StarHub's ASTL and D'Crypt acquisitions won't save its falling earnings

75% of its revenue belong to its mobile, pay TV and broadband businesses, which are all declining.

CIMB Research is still bearish about StarHub's earnings within 2016 to 2020 despite its acquisition of cybersecurity firms Accel Systems & Technologies Pte Ltd (ASTL) and D'Crypt.

According to a report, StarHub’s share price rose by almost 16% from its low in mid-August 2017, after its fixed network services (FNS) business registered improved performance in 3Q2017 after it acquired ASTL.

StarHub then agreed to acquire D’Crypt, which is expected to further expand its suite of cybersecurity solutions to enterprise/government customers and contribute positively to future earnings.

Following the acquisitions, FNS revenue can grow by 6.2% YoY in 2017, then jump by 15.9% and 7.4% in 2018 and 2019.

ASTL and D'Crypt could also collectively contribute $11.6m in 2019.

However, the increase in FNS revenue will not be able to fully offset the declining revenues in its mobile, pay TV and broadband businesses, which make up the balance 75% of service revenue.

Here's more from CIMB Research:

We believe StarHub could make further FNS-related acquisitions. Based on its balance sheet, we estimate it may have room to invest up to a further c.S$300m.

Assuming an acquisition P/E of 10x, StarHub could buy companies that generate up to an aggregate $30m in net profit.

After interest cost (3-4%) to fund such acquisitions, net profit accretion would be c.S$20m. However, despite its intentions, there is no guarantee that StarHub can find more good companies to acquire at a reasonable price.

In our base case, we have assumed a cumulative 10% impact on StarHub’s mobile ARPU in FY19-20F from TPG’s market entry. In the bull case, if the cumulative impact is only 5%, then its EBITDA/net profit will decrease by a lower 4.4%/23.6% in FY16-20F.

In the bear case, if mobile ARPU is impacted by a cumulative 15%, EBITDA/net profit will drop by a more substantial 18.6%/47.4% over the same period.

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