StarHub – AmFraser
Revenue streams to be boosted by OpCo
- Infocomm Development Authority (IDA) of Singapore has selected StarHub Limited as the Operating Company (OpCo) for the Next Generation National Broadband Network (NGNBN). Together with the award of the Network Company to OpenNet in September 2008, the core structure of IDA’s iN2015 vision for an ultra high-speed infrastructure is in place to wire up Singapore as an intelligent island by 2015. OpenNet consortium comprises SingTel (30%), Canadian-based Axia NetMedia (30%), Singapore Press Holdings (25%) and SP Telecommunications (15%).
- StarHub will be setting up a new wholly-owned subsidiary to fulfill the operational separation purpose of the OpCo, called Nucleus Connect, within the next 12 months. OpCo, Nucleus Connect will design, build and operate the active infrastructure of the NGNBN, i.e. lighting up the fibre ducts and wholesaling bandwidth to Retail Service Providers (RSPs). Nucleus Connect will work with OpenNet on a coordinated nationwide rollout of the network. With the NetCo’s sped up deployment from the use of existing ducts and other infrastructure assets transferred from SingTel, Nucleus Connect expects to offer commercial services by April 2010.
- Nucleus Connect expects to spend about S$1bil over its 25-year OpCo licence, while it will receive a S$250mil grant from IDA. In the initial two-to-three years, StarHub expects to invest S$100mil in Nucleus Connect, and projects the latter to be self-financing after. With a ready base of corporate customers (albeit small relative to SingTel’s), StarHub stands all ready to be Nucleus Connect’s first customer as an RSP. As part of the terms of the award, Nucleus Connect has targets to garner 330,000 residential subscribers and 80,000 non-residential subscribers by 2015.
- n For the first six years, IDA has capped pricing at S$15 per residential line and S$50 per non-residential line for Nucleus Connect to pay NetCo for the use of the fiber. At the same time, Nucleus Connect will wholesale basic services starting from S$21 per 100Mbps for residential use and S$75 per 100Mbps for non-residential use. For basic 1 Gbps services, these are S$121 for residential and S$860 for non-residential.
- We view the award as positive for StarHub as Nucleus Connect will open up new revenue streams from an enlarged RSP market. In addition, progress of the NBN project also enables StarHub – as an upcoming RSP – to garner more corporate broadband customers because the Open Access nature of NBN levels the playing field. To-date, StarHub’s coverage is up to 800 commercial buildings, mostly within the CBD area. But as corporates move away from CBD to cheaper premises, there will be increasing demand from outlying areas, which it will be able to serve from April 2010.
- Fair value is raised to S$2.28/share. Our previous fair value of S$2.17/share was based on a 5% discount to DCF approach because of StarHub’s vulnerability to rising content costs and weaker buffer to sustain DPS. Given potential for new revenue streams from OpCo, this offsets such negativity and we believe StarHub should trade up to its fair value. As such we upgrade our rating to BUY with upside of 15%.