StarHub – OCBC

May surprise with lower content costs

Big shakeup in Pay TV arena. StarHub Ltd is likely to face a big shakeup in its Pay TV segment after losing the coveted EPL (English Premier League) broadcasts for 2010-2012 seasons as well as the ESPN STAR Sports (ESS) to SingTel from mid-2010. In response, StarHub announced that it plans to lower its sports package pricing (by as much as half) as well as offer two free sports channels of its own to combat subscriber defection. In addition, StarHub believes that the impact of the loss of its premier sports content will remain EBITDA neutral, as it expects just 10% of its 535k subscribers to give up its pay TV services completely, and this will be balanced by lower sports content cost.

May see some unravelling of its Hubbing strategy. However, we are less sanguine. Instead, we believe the loss is probably closer to 15-18% and it will also suffer a double whammy in terms of ARPU. Last but not least, it may also lose some of the stickiness needed to keep its “hubbing strategy” going. As such, we have since adjusted our FY10 estimates accordingly to reflect our concerns (revenue down 12.8%, earnings down 11.4%) in our previous report. Nevertheless, we see room to revise up our estimates should the defection numbers and the drop-off in ARPU is less than what we are expecting.

NBN may boost fixed network segment. On the other hand, the roll-out of the NBN from mid-2010 should give a lift to its fledging fixed network services. Besides winning the OpCo bid through its subsidiary Nucleus Connect (NC), the “open” framework will allow StarHub to reach out to thousands of non-residential buildings that it currently does not service today. It should also be able to enjoy cost savings from the current leasing expenses it needs to pay SingTel. However, StarHub notes that competition may increase ahead of the NBN launch from mid-2010.

Maintain BUY with S$2.29 fair value. Despite the shakeup in the Pay TV segment, we believe that the recent sharp drop in share price has more than taken this into account. In fact, we may get a pleasant surprise from sharply lower content costs from mid-2010 onwards. StarHub has also committed to pay at least S$0.05 as quarterly dividend from 4Q09 onwards and based on our projected free cashflows, we believe that StarHub can easily sustain the same payout in 2010. Maintain BUY with S$2.29 fair value.

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