StarHub – AmFraser

Forecasts and fair value lowered on loss of BPL and ESPN Star Sports

• We have lowered our fair value to S$1.94 – based on a DCF approach – revising our terminal growth assumption from – 5% to -6% on the back of reduced opportunities and increased competition in the Pay TV market. StarHub Ltd (StarHub) is currently trading close to our fair value. We recommend a HOLD rating.

• Recent price fall reflects much negative impact from the loss of key sports content in the Barclays Premier League (BPL) and ESPN Star Sports. With the outcome of its biggest risk known, we believe downside is now limited. We quantify the impact as muted on overall bottomline as Pay TV accounts for a fifth of total revenue.

• We have cut our EPS forecasts by 5% in FY10 and FY11, based on a worst case scenario of StarHub losing all sports pack revenues and a 10% cable TV subscriber migration. Management guides that less than half of subscribers take up sports pack among other add-ons with a lesser 10% solely adding-on sports. Latter 10% segment represents risk of migration.

• Elimiation of BPL as a loss leader will be positive after initial negative sentiment over a shake-up in the cable TV segment. We estimate that three-year rights to BPL and ESS amounts to S$240mil. Our low-end estimate for this cost item renders our revised bottomline forecasts as conservative. Strpping off S$80mil in expenses on a full year basis from 2H 2010 revises our EBITDA forecast margin for FY11 from 31.3% previously to 31.7%.

• All is not lost in the Pay TV market. Genre of football and sports is SingTel’s only big value proposition, but StarHub still holds sway with a wider range of other content. We believe there is room for both operators, each serving different interest groups with their differentiated packaging and pricing.

• An improvement in newsflow for StarHub’s OpCo operation  in the Next Generation National Broadband Network from end 2009 into 1Q10 buoys prospects for StarHub in the mid-term. Market has, hitherto, not factored in a potential upside from this new revenue stream due to a lack disclosure so far.

• We expect more revelations, as NetCo, the infrastructure provider in NGNBN, approaches its critical 60% rollout target at end 2009. StarHub’s wholly-owned OpCo is scheduled to launch commercial operations at end 1Q10.

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