Month: October 2009
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.
TELCOs – DBS
Structural rise in competition?
• Our checks indicate rising competitive intensity in the sector, and we see this as a trend rather than exception next year.
• We lower M1’s FY10F earnings by 6%, now 2% below consensus. Our StarHub’s FY10F earnings are 5% below consensus. Given that M1 offers 7.3% yield with stable earnings prospects, investors may seek higher yield of atleast 9% from StarHub due to the challenges ahead. Downgrade StarHub to FV and M1 to HOLD
• For SingTel, its Indian associate Bharti retaliated with lower tariffs in the second week of October. We trimmed SingTel’s FY11F earnings by 3%, now 4% below consensus. Maintain HOLD for SingTel with lower TP of S$3.20.
Intense competition for market share in the post-paid mobile segment. Our shop visits indicate that all the players are offering up to 50% discount on the published mobile data rates, implying that ARPU may not have much upside, while network capex may rise significantly, as data traffic typically consumes manifold network capacity than voice traffic. M1 and StarHub, on top of the usual handset subsidy, are offering discount of S$100 to the customers who switch from other operators. Broadband tariffs are also under pressure, as consumers prefer to stay with low-end plans. This may adversely impact the margins of all the players in the industry, in our view.
Higher competition may be a trend, not an occasional spike. We see competitive intensity going up rather than coming down in 2010. SingTel’s EPL pricing of S$23/month (compared to StarHub’s min S$25) despite higher content cost vindicates our fear of aggressive customer acquisition targets. Recently, M1 secured iPhone deal, raised its FY09F capex by 20%, and is keen to secure broadband subscribers through National Broadband Network (NBN) next year. StarHub faces an uphill task of defending its mobile and broadband market share, in the face of possible pay TV market share decline next year, in our view.
No excitement in the sector and too early for bargain hunting. M1 trades at 7.3% yield with stable earnings prospects. In our view, investors may seek potentially higher yield from StarHub, at least 9% yield, given risk of mid-single digit earnings decline in the next two years before it stabilizes.
SingTel trades at 4.5% yield with mid-single digit growth prospects, over the next two years, which appear to be reasonable in our view.
StarHub – DBS
Investors may seek higher yield
• The competition across mobile segment may continue to rise as StraHub seeks to defend its market share.
• Given that M1 offers over 7% yield with stable earnings prospects, investors may seek atleast 9% yield from StarHub.
• Based on 9% yield, our revised target price is S$1.90. We downgrade StarHub to FULLY VALUED.
Our key assumptions for StarHub under the base case scenario. Given that about 10% of StarHub’s pay TV subscribers mainly subscribe for EPL matches, we have assumed subscriber decline of 10%/8%, 10%/8% and 3%/2% across pay TV, broadband and postpaid mobile segments respectively over FY10F/11F. We have assumed cable TV ARPU to decline by 20%/10% for FY10F/11F. We expect earnings decline to reverse in FY12F. Given that StarHub’s free cash flow exceeds earnings, we forecast DPS to be over 16 Scents for FY10F and beyond, translating to 98% payout ratio. StarHub has already committed to 18 cents dps for FY09F.
Mobile market share may not decline, if StarHub turns more aggressive. We believe that StarHub could turn more aggressive on the mobile front with higher handset subsidies and other promotions. In our opinion, StarHub may deepen the bundling discounts, so that its pay TV subscribers retain StarHub even when they subscribe to SingTel’s mio TV for EPL matches. StarHub’s mobile market share could still be protected, although not without adverse impact on the margins.
How much yield would investors seek? Due to the risk of earnings decline in FY10F/11F, investors may potentially seek higher yield from StarHub. Given that M1 offers over 7% yield with stable earnings
prospects, investors may seek at least 9% yield from StarHub till earnings decline trend reverses in FY12F. Assuming 17 cents dps in FY10F, based on 9% yield, our revised target price is S$1.90. We downgrade StarHub to FULLY VALUED.
SingTel – DBS
Bharti retaliates with price cuts
• We lower Bharti’s FY11F earnings by c.7%. Bharti’s consensus FY10F/11F earnings could possibly come down by 10%/19%.
• SingTel’s consensus FY10F earnings look fair but FY11F earnings could be trimmed by 4%.
• SingTel’s TP lowered to s$3.20. Maintain HOLD
Rcom initiated tariff cuts in the first week of October. Rcom cut its tariffs up to 50% under its “Simply Reliance Plan” on long distance and roaming calls. The lower tariffs would particularly hit hard the players – who do not own long distance lines and pan India presence.
Bharti and other players retaliate in the second week of October. We understand that major players like Bharti, Vodafone and Idea have already launched similar plans as Rcom, across various circles without much publicity and fanfare though. Given swift reaction across the board, we see a possibility of intensified battle for market share. We lowered Bharti’s FY11F earnings by 7% as FY11F earnings may see single-digit decline due to c.5 ppt decline in EBITDA margins. Bharti’s FY10F/11F consensus earnings could come down by 10%/19% in our view.
SingTel’s consensus FY10F numbers look all right but consensus FY11F numbers could be revised down. SingTel’s FY10F earnings are unlikely to disappoint due to (i) stronger Aussie dollar and Indonesian Rupiah (ii) strong performance of Telkomsel in Indonesia. However, consensus FY11F numbers may come down by c.4% as street realizes the impact of price wars on Bharti’s FY11F earnings.
SingTel’s FY11F earnings lowered by 3%. We have assumed S$40m loss (about 1% of group earnings) due to high cost of English Premier League (EPL) rights in FY11F. Our SOTP target price is lowered to S$3.20 as we lowered our fair value of Bharti by 8% to Rs 345 based on 15x FY10F earnings.
M1 – DBS
Consistent strategy but sector woes
• Lower data pricing and discounts on mobile services are being offered in the market now.
• M1 may find it difficult to compete in the mobile and broadband segments, given rising competitive intensity in the sector. Our FY10F earnings lowered by 6% due to higher opex.
• M1 has outperformed STI by 8% since our upgrade on 22 Jun 09. Downgrade to HOLD with revised TP of S$1.95
Intense competition in the post-paid mobile segment. We observed that all the telcos are offering 50% discount on their published mobile data plans in order to encourage users to adopt data plans. As a result, ARPU may not rise much, while network capex may rise substantially, as data traffic typically consumes manifold network capacity than voice traffic. In addition, M1 and StarHub, on top of the usual handset subsidy, are offering discount of S$100 to the customers who switch from other operators. This may adversely impact the margins of the telcos.
Higher competition may be a trend, not an occasional spike. We see competitive intensity going up rather than coming down in 2010. SingTel’s EPL pricing of S$23/month (compared to StarHub’s min s$25) despite higher content cost vindicates our fear of aggressive customer acquisition targets. Recently, M1 secured iPhone deal and raised its FY09F capex by 20%, indicating an aggressive agenda ahead. StarHub faces an uphill task of defending its mobile and broadband market share, while realizing that pay TV market share is liklely to decline next year. Our FY10F earnings lowered by 6% due to higher opex. Our target price is S$1.95, still pegged to 12x average FY10F EPS. The stock trades at reasonable 7.3% yield for stable earnings prospects. With higher capex requirements, we see lower possibility of capital management in FY10F.