SingTel – DBS

More Challenges Ahead

Story: In our view, StarHub’s pay TV and broadband business are going to face more headwinds in the medium to long term.

Point: We have three key points to highlight here.

1. Broadband business under pressure from declining ARPU. After comparing with Hong Kong, we think that broadband tariffs can decline by almost 50% in two to three years time. Currently, broadband business accounts for an estimated 23- 24% of StarHub’s EBITDA.

2. Pay TV business to experience higher cost of content. Two of the most popular contents – English Premier League (EPL) 2010-2012 and FIFA World cup 2010 are up for renewal in the middle to late 2009. With a more aggressive SingTel, the content cost could even double from an estimated S$150m for EPL in 2006. This could further escalate the losses of the pay TV business for StarHub.

3. Our revised FY08 and FY09 earnings estimates are 3.5% and 7.5% below consensus. We have lowered our FY08 and FY09 earnings estimates by 2.9% and 3.6% respectively. We think the key difference from consensus could be the EBITDA estimates for cable TV and broadband segment. We expect the margins to fall sharply in this segment as indicated in table on the next page. We expect mobile margins to fall gradually over the time.

Relevance: We peg our target price to 14x average FY08-FY09 EPS at 20% premium to our target PER of 12x for M1, towards the lower end of StarHub’s historical PER range (13.3x-19.4x) when it was considered a growth stock. We maintain FULLY VALUED with revised TP of S$2.50. Additional 6% yield from capital management assuming target of 1.5x net debt to EBITDA depends on the decision to participate in OpCo bidding.

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