StarHub’s Strateq deal offers ‘reasonable’ valuation: DBS

The KL Tower is seen, with a background of the cityscape in Kuala Lumpur, Malaysia.

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.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.