Telecom – OCBC
Likely muted World Cup demand
Likely muted World Cup demand. The month-long 2010 World Cup campaign kicked off in South Africa last Friday. As a recap, both SingTel and StarHub have managed to secure the broadcast rights for all 64 matches of the month-long 2010 World Cup event in South Africa; this was done via two separate non-exclusive contracts after their earlier joint bids were repeatedly rejected by FIFA. However, various media reports suggest that the take-up rate for the subscription packages could be muted. For example, a quick poll done by The StraitsTimes just a day before the kick off found that only 37 among the 625 HDB households (6% take-up rate) it surveyed had signed up for the package – the high pricing of the packages was given as one of the stumbling blocks.
Pricing may be the sticking point for home viewers. As mentioned previously in our May report, we believed that the higher pricing of S$88 before GST (nearly 4x more expensive than the 2006 World Cup) would be a sticking point for home viewers. According to data compiled by Bloomberg, the charges make Singapore one of the most expensive places to watch the World Cup. We noted that the packages were also higher than our back-of-the-envelope calculation of around S$40.Conversely, a dip in the take-up from home viewers could see better response from the business segment, as F&B establishments use the "live" telecasts to attract viewers who are not subscribing for the event. Assuming that the telcos paid a total of S$20m for the rights and that the average subscription price is S$70/subscriber, the telcos would probably need to sell 280k packages to break even (before advertising revenue).
WC costs felt in 2Q and 3Q. In any case, we expect to see higher content costs being booked in the second and third quarters, leading to slightly depressed margins for both SingTel and StarHub. However, if the take-up rate comes in worst than expected, we note that there is a risk of seeing further margin compression. On the other hand, we see M1 Ltd emerging as a better bet (at least in the near term) as it is not going to face this risk of a World Cup disappointment in the coming two quarters. That said, we continue to like the telcos for their defensive earnings and high dividend yields, especially in the increasingly volatile market. Maintain OVERWEIGHT.