StarHub’s deal to buy 88 per cent of Malaysian IT services provider Strateq for S$82.1 million is a profitable acquisition at a “reasonable” price, DBS said in a note Thursday.
Strateq offers data-driven digital services mainly to enterprise and government customers in Malaysia, Singapore, China, Hong Kong, Thailand and the US, StarHub said in a filing to SGX Wednesday. The Malaysian company focuses mainly on healthcare information systems, retail fuel IT and payment services, cloud services, data analytics, data center services and IT infrastructure projects.
DBS cited market research showing those segments were expected to grow at “high-single digit to double-digit rates over the next few years.”
The acquisition price works out to 20 times price-to-earnings ratio, “quite reasonable for a growth company in the digital area,” DBS said.
Strateq was expected to remain profitable despite moves to scale up the business, DBS said.
“Strateq does not have to invest in new products and intellectual property (IP) rights unlike the cyber-security business,” DBS said. “Strateq’s existing products can be cross-sold to StarHub’s enterprise customers in Singapore while StarHub will support its overseas expansion given that Strateq typically follows its customers. Strateq is self-funded so we don’t expect much pressure on StarHub’s cashflows.”
The bank estimated Strateq could contribute S$3 million to S$4 million to StarHub’s earnings, although the Singapore telco could face interest costs of around S$2 million to S$3 million to fund the deal.
StarHub said the deal would strengthen its enterprise digital services capabilities, in line with the Singapore telco’s creation of Ensign InfoSecurity as a pure-play on cybersecurity for enterprise and government clients. Ensign was formed in 2018, with a combination of StarHub’s cybersecurity assets and Temasek-owned cybersecurity company Quann.
Daiwa said the deal “is marginally positive to its outlook as it satisfies twin objectives of diversification and earnings accretion.”
But it added, “synergies do not appear that obvious or substantial to us at the moment. Instead, geographic diversification and a desire to grow its enterprise business appear to be the driving factors behind the transaction.”
The strategy of investing in the enterprise market without making dividend-jeopardizing big-ticket purchases was “sound,” Daiwa said in a note Thursday.
Strateq’s net profit before tax, minority interests and exceptional items in fiscal 2019 was around 17.99 million ringgit, or around S$5.92 million, the SGX filing said.
The rest of Strateq will be held by Strateq’s Group Managing Director Tan Seng Kit, StarHub said.
The deal is expected to be completed by the end of the first half of this year.