TELCO – Kim Eng

Telco Sector Update

Previous day closing price: StarHub $1.97, SingTel $3.08
Recommendation: StarHub Sell (maintained), SingTel Buy (maintained)
Target price: StarHub $1.80, SingTel $3.51

SingTel relieves football fans’ worries…
SingTel has sprung a surprise on consumers and stolen a march on StarHub. From Aug next year, it will cost only $25 a month to watch BPL and other sports content on mio TV ($23 for just BPL) versus $49 for StarHub. Unlike StarHub, there is no basic tier fee, while UEFA Champions League and Europa League as well as the first set-top box (in high definition) are also free. While households without a fixed phone line will need to pay a monthly charge, we estimate consumers will still stand to save 39-55% over StarHUb’s present charges.

…and goes for StarHub’s jugular
By making its pricing for sports content so attractive and announcing it just 10 days after it won the BPL bid, SingTel has made the consumer’s decision to switch an easy one and made StarHub’s response so far (e.g. calling for public consultation over SingTel’s win, waiving termination fees for those who recently signed up just for BPL, etc) pale in comparison. The only stumbling block now lies in the unwieldy arrangement where dual provider households need to have two set-top boxes. While there is still a need for a fixed phone line, the NGNBN will do away with that requirement once it is up and running.

SingTel’s moves are rational despite price aggression
Although SingTel is unlikely to recoup the cost of BPL through Pay TV subscriptions alone, we reckon it will unveil higher-priced, higher-value bundles to attract subscribers to buy its broadband and mobile services as well. Also, SingTel may increase prices for future seasons. There is a good chance it will be able to make this a profitable proposition when viewed from a triple-play perspective and on a three-year horizon. In addition, the advent of NGNBN will make the local telco scene even more competitive and SingTel’s move to secure market share ahead of that seems a rational one despite its willingness to drive up content costs.

StarHub could be in for more pain
In the next 12-24 months, we think SingTel is very likely to use its deeper financial pockets to pursue the acquisition of other sports content such as World Cup as well as entertainment and news channels such as CNN, CNBC, Discovery, HBO and Cinemax. Success in this arena as well as the closing of the technological gap between SingTel and StarHub (SingTel has promised to deliver mio TV access to the whole country by 31 July 2010) could potentially mean more pain in store for StarHub.

Recommendations maintained
On balance, we maintain our present recommendations – Buy for SingTel with a target price of $3.51 and Sell for StarHub with a target price of $1.80.

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