StarHub – OCBC
New Pay TV ruling more positive
Good share price performance. StarHub’s share price has done pretty well since dipping to a low of S$2.08 on 18 Feb with a 11.1% rebound to hit a high of S$2.31; this compared to the 4.6% rise in the STI over the same period. Besides the expected improvement in its defensive earnings and its attractive dividend yield of 9.6% (based on then price of S$2.08), we believe that the recent gains were also driven by the latest revamp made by the Singapore government in the Pay TV industry recently.
Significant revamp for Pay TV industry. As a recap, Pay TV providers are now required to cross-carry each other’s content that is acquired or renewed on an exclusive basis; this allows Pay TV customers to watch all Pay TV content with their preferred operator without having to pay any extra fee for doing so. Instead, the content supplier needs to pay competitors a fee for carrying its content; in return, the competitor must not modify the content in any way, including ads and branding. However, this only applies to any contract signed or renewed from 12 Mar 2010: this means that previously signed content like the much-watched English Premier League (EPL) will continue to be carried exclusively by SingTel’s mio TV.
Move more positive for StarHub. Still, the new ruling is likely to be slightly more positive for StarHub, as its cable TV system is likely to remain the preferred mode of transmission, given that it has already penetrated some 539k homes (as of end 2009). The mandate to “share” exclusive content would also reduce SingTel’s impetus to use its strong balance sheet to acquire such content to drive the take up of its mio TV services; this likely leading to less aggressive content bidding (but not eliminate in our view as having more content to offer still means higher revenue), further reducing StarHub’s content cost.
Maintain BUY with improved S$2.44 fair value. We also think that the potential subscriber loss for its Pay TV services would not be as large as previously estimated (in light of the loss of 2010-2012 EPL broadcast right). As such, we are revising up our FY10 and FY11 revenue by 9.0% and 1.4% and net profit by 3.0% and 6.6% respectively. Our DCF-based fair value also rises from S$2.29 to S$2.44. Coupled with a 8.7% dividend yield, we maintain our BUY rating.