Starhub – CIMB
• Downgrading our call. We cut StarHub to a counter-consensus UNDERPERFORM recommendation from neutral, as we believe competition has yet to fully play out.
• A lose-lose scenario emerging. A fierce bidding war is on the cards between StarHub and SingTel as the crown jewel of content – the rights for the Barclays Premier League – for the 2010-2012 seasons and the 2010 World Cup will up for bidding by mid-09. Pay TV is a key laggard in SingTel’s portfolio and a hindrance to any meaningful quad-play proposition. StarHub stands to foot a much heftier bill to win or it may lose substantial market share if it loses out to SingTel. The potential loss of StarHub’s BPL rights may threaten its successful strategy of bundling multiple services by giving SingTel a crucial foothold in this space.
• Lower mobile margins and growth. We expect mobile margins to be structurally lower and growth to slow due to ARPU and cost pressures with MNP in place. • Capital management? Don’t hold your breath as we think StarHub will be conservative on its balance sheet ahead of the bids for BPL, World Cup and NGNBN. At 1.4x net debt/annualised EBITDA, its gearing is at a record high.
• Cutting earnings forecast and target price. We revise StarHub’s core FY08-10 net profit forecast by -22% to +0.7%, namely on higher content costs. As a result, our DCF-based target price falls to S$2.30 (WACC 7.5%, terminal growth: 1.7%) from S$3.00. De-rating catalysts include a) rising concerns over the cost of content, in particular football, b) delay in capital management and c) continued stiff competition.