Month: October 2009
StarHub – CIMB
From hubbing to drubbing
More light on the BPL loss
Maintain UNDERPERFORM, target price and earnings forecasts. We maintain our earnings forecasts pending details on the impact on StarHub’s top and bottom lines from the loss of British Premier League (BPL) broadcasting rights to SingTel during StarHub’s 3Q09 conference call. There is no adjustment to our DCF-based target price of S$1.58 (WACC: 9.4%, LT growth: 1.0%). Maintain UNDERPERFORM as we remain concerned about: 1) a potential spike in pay-TV churns; c) an unravelling of its hubbing model; and 3) the prospect of SingTel snaring more content from StarHub. StarHub’s CEO has provided some insights into the firm’s loss of the 2010-12 BPL rights. We believe the group had underestimated the threat posed by SingTel, could not match the financial muscle of SingTel and was handcuffed from bidding too aggressively as it would not have been able to pass on the increased costs given probable caps on retail tariffs.
StarHub’s CEO’s thoughts on the loss are as follows:
• The outcome of the auction process was not what StarHub had wanted or expected as the CEO had felt strongly that StarHub could retain the rights either on an exclusive or non-exclusive basis.
• While not underestimating SingTel, he felt it was too risky for SingTel to take on BPL because:
• Firstly, SingTel’s ADSL2+ service is not adequate in many parts of Singapore to deliver acceptable-quality IPTV services and SingTel would not be able to serve the entire market with IPTV unless it upgraded its network. Thus, StarHub thought SingTel would bid aggressively only in 2012.
• Secondly, the MDA had been rather explicit that it was studying the BPL situation and would look very unfavourably on any efforts to raise retail pricing.
• As it was not recovering the cost of Champions League and BPL, had network issues and could not raise retail prices, StarHub believed that it did not make sense for SingTel to bid aggressively this round. Interestingly enough, the prospect of a joint bid was possible until the last moment.
• StarHub believed that winning the rights would not benefit SingTel’s business. While unable to divulge SingTel’s bid, StarHub noted that it was a substantial amount over what StarHub was paying. The press has estimated the amount at S$283m (S$400m).
• StarHub’s CEO revealed that only 10% of customers take up the sports package and at least three basic groups. There are more subscribers who sign up to content other than sports. StarHub believes there would be a minimum loss of its pay-TV service presence in households. With negative margins from BPL eliminated, it can allocate more resources to shoring up content and its hubbing proposition.
StarHub will be providing more details on the impact of the loss on its top and bottom lines in its 3Q09 results. It notes that the damage would not be as big as some had feared.
Comments
Underestimated SingTel. Our overall impression was that StarHub had underestimated the threat posed by SingTel. In a post-NGNBN world and in its bid to transform into a multimedia company, it will be critical for SingTel to acquire meaningful content to differentiate itself. The problems outlined by StarHub, while legitimate, are not completely insurmountable. By July 31, SingTel’s ADSL2+ network should reach the entire island from 90% coverage now and issues over its quality should be resolved by then. SingTel Singapore’s CEO Allan Lew was quoted as saying that every home and every business will have access to BPL by that time.
Does not possess the same financial muscle. The other main point was that StarHub lacks the financial muscle to compete with SingTel in a head-on bidding war by virtue of its smaller size. StarHub’s ability to bid up the cost was effectively curtailed by the MDA’s warning to potential bidders about raising retail tariffs. We feel that StarHub was not willing to absorb further pain and margin compression as this would have destroyed shareholders’ value. Cable margins had fallen to 26% from 19% in 1Q08. SingTel, on the other hand, has no such qualms as it is seeking to establish its foothold in pay TV. While dilutive, the impact can be absorbed by its other businesses.
Does not change our view. SingTel is now the premier sports content provider having snared the game-changing BPL rights. The next content up for grabs is the 2010 World Cup where SingTel will give it its best shot. As other exclusive content comes up for renewal after end-2011, we believe SingTel will continuously bid for this in the areas of education, entertainment, movies and drama. StarHub currently has rights to exclusive content such as HBO, National Geographic, CNN, Cinemax and Discovery.
Still a winner’s curse. Although the win would completely transform SingTel’s pay-TV business, it would still be overall negative for SingTel, in our view, as:
• SingTel is unlikely to recover the cost of the rights, which has skyrocketed from S$250m in the 2007-09 seasons to an estimated S$400m. We believe that SingTel will be a loss leader in this segment, leading to negative margins in the initial years.
• SingTel will charge S$23/month, in the first year, for subscription to BPL alone and S$25/month for BPL plus additional sports content (tennis, F1, ESPN, ESS, etc). It would not raise prices in the second and third years. The S$25/month is the same as StarHub’s current charges for its sports package.
We believe that positively, mio TV could be flooded with 239K new subscribers, assuming 45% of the subscribers are on sports, from its base of 101K. SingTel has agreed with StarHub’s assessment that about a quarter of households watch sports alone or an estimated 286K households.
The negative impact is estimated at S$62m p.a. or a marginal 3% on SingTel Singapore and 1.4% of the group’s FY11 EBITDA. We arrive at this figure after assuming that the rights are won at a cost of S$400m (S$133.3m per annum) and SingTel manages to lure about 239K subscribers (entire estimated 45% of subscribers who sign-up for sports packages at StarHub) who will pay S$25/month (S$71.6m per annum). Our estimate does not take into any account additional revenue from advertising.
What sort of impact on StarHub? As customers who sign up before 1 Oct 09 can cancel after Jul 10 without paying a penalty, StarHub’s FY10-11 core profits could be reduced by 19-25% as customers churn and its topline could be crimped to 9%.
Losses could escalate if a mass defection occurs. This is based on the following assumptions.
• While less than half of the subscribers are on sports packages vs. our earlier expectation of 60-70%, we have assumed a 20% churn for FY10-11 as our base case. We believe that some customers may want to retain their subscriptions for other content such as movies, learning and entertainment.
• In addition, we expect some unravelling of its hubbing appeal where we have assumed that 50% of the pay-TV churners will be postpaid mobile and broadband users who will also churn.
Valuation and recommendation
Maintain UNDERPERFORM, target price and earnings forecasts. We maintain our earnings forecasts pending details on the impact on StarHub’s top and bottom lines from the loss of BPL broadcasting rights to SingTel during StarHub’s 3Q09 conference call. There is no adjustment to our DCF-based target price of S$1.58 (WACC: 9.4%, LT growth: 1.0%). Maintain UNDERPERFORM as we remain concerned about: 1) a potential spike in pay-TV churns; c) an unravelling of its hubbing model; and 3) the prospect of SingTel snaring more content from StarHub.
SingTel – BT
SingTel wires up to score with business
Coaxial cabling technology to help bring EPL matches to commercial pay-TV clients
Fresh from announcing its consumer pricing for the English Premier League matches, SingTel reveals that it has another plan up its sleeve.
The telco has been quietly conducting in-house trials aimed at allowing potentially tens of thousands of local businesses to tune in to the next season of the popular soccer tournament in August 2010.
Field deployment of the networking technology to wire up this lucrative customer segment will begin in the coming months.
In a phone interview with BT on Saturday, SingTel Singapore CEO Allen Lew said the company has carried out a series of in-house ‘technical laboratory trials’ to determine the feasibility of using coaxial cabling systems to carry its pay-television signals.
This approach is different from the technology used by SingTel’s existing mio TV platform. The operator’s pay-TV programmes are currently streamed over the Internet using its ADSL (asymmetric digital subscriber line) broadband infrastructure.
With this method, customers are still required to have a phone line and there are also bandwidth limitations which could inhibit the number of high-definition channels that can be streamed at any one time.
The existing ADSL technology is also unsuitable for businesses such as hotels, restaurants, pubs and coffeeshops looking to screen soccer matches over multiple television screens within their premises. This is an important consideration for pay-TV operators as commercial customers typically pay twice or more for their subscription packages compared to consumers.
While the future nationwide fibre-optic network could solve the problem, the project is still a work-in-progress and it will only be fully completed in December 2012, towards the tail end of SingTel’s three-year EPL broadcast contract.
Coaxial cabling technology, on the other hand, has been used by StarHub and many telcos around the world to deliver their cable television and broadband services to consumers and businesses for some time. Coaxial cabling and ADSL lines are the two most prevalent copper-line networking technologies used by telcos today.
Coaxial cables are cheaper and faster to deploy compared to fibre-optic cabling while having a sufficient capacity to carry multiple channels of high-definition video and Internet content.
‘We will use our existing copper (cables),’ said Mr Lew.
SingTel currently owns the most extensive underground broadband infrastructure in Singapore, a complex mishmash of fibre-optic links and cheaper copper cables at the ‘last mile’ which connects to homes and businesses.
SingTel’s coaxial cabling plan looks to be the final piece of jigsaw to fulfil its promise of wiring up all homes and businesses ahead of the 2010 EPL season. It means the telco will be banking on a combination of technologies, including ADSL, fibre-optics and coaxial cabling, to meet this ambitious deadline.
‘The business community is where we are fundamentally strong,’ said Mr Lew. Dedicated account teams will be set up to service commercial pay-TV customers but pricing will be determined on a case-by-case basis as their needs are different, he added.
StarHub had questioned SingTel’s ability to pull off the feat of wiring up Singapore for EPL within 10 months but Mr Lew is bent on proving his arch-rival wrong. ‘We have never said something and not delivered,’ he stressed.
SingTel already held up its promise of not charging consumers more for EPL with the announcement of its price plans on Saturday.
Consumers will have to pay $23 a month to catch the 2010-2011 EPL season on mio TV without having to fork out extra for a basic pay-TV package or for set-top box rental.
As an added sweetener, SingTel will even throw in the Uefa Champion’s League and Europa League matches for free. For an additional $2, customers will get additional channels from ESPN Star Sports, the company which owns the broadcast rights to a bonanza of other sporting events including the Formula One, the Australian Open, Wimbledon and the US Open Golf Championship.
StarHub customers currently pay around $52 for their football fix. This includes a $25.58 monthly subscription fee for the firm’s basic tier, as well as the $26.75 it charges for the sports package.
Some market watchers have questioned SingTel’s ability to recoup its hefty EPL investment since rival StarHub and even Hong Kong’s PCCW failed to make money from screening the coveted soccer league.
But said Mr Lew: ‘We don’t just look at it (EPL) on a narrow basis – there’s a huge impact on our overall consumer business. We know what we have to achieve to make it (EPL) value-accretive.’
TELCO – Kim Eng
Telco Sector Update
Previous day closing price: StarHub $1.97, SingTel $3.08
Recommendation: StarHub Sell (maintained), SingTel Buy (maintained)
Target price: StarHub $1.80, SingTel $3.51
SingTel relieves football fans’ worries…
SingTel has sprung a surprise on consumers and stolen a march on StarHub. From Aug next year, it will cost only $25 a month to watch BPL and other sports content on mio TV ($23 for just BPL) versus $49 for StarHub. Unlike StarHub, there is no basic tier fee, while UEFA Champions League and Europa League as well as the first set-top box (in high definition) are also free. While households without a fixed phone line will need to pay a monthly charge, we estimate consumers will still stand to save 39-55% over StarHUb’s present charges.
…and goes for StarHub’s jugular
By making its pricing for sports content so attractive and announcing it just 10 days after it won the BPL bid, SingTel has made the consumer’s decision to switch an easy one and made StarHub’s response so far (e.g. calling for public consultation over SingTel’s win, waiving termination fees for those who recently signed up just for BPL, etc) pale in comparison. The only stumbling block now lies in the unwieldy arrangement where dual provider households need to have two set-top boxes. While there is still a need for a fixed phone line, the NGNBN will do away with that requirement once it is up and running.
SingTel’s moves are rational despite price aggression
Although SingTel is unlikely to recoup the cost of BPL through Pay TV subscriptions alone, we reckon it will unveil higher-priced, higher-value bundles to attract subscribers to buy its broadband and mobile services as well. Also, SingTel may increase prices for future seasons. There is a good chance it will be able to make this a profitable proposition when viewed from a triple-play perspective and on a three-year horizon. In addition, the advent of NGNBN will make the local telco scene even more competitive and SingTel’s move to secure market share ahead of that seems a rational one despite its willingness to drive up content costs.
StarHub could be in for more pain
In the next 12-24 months, we think SingTel is very likely to use its deeper financial pockets to pursue the acquisition of other sports content such as World Cup as well as entertainment and news channels such as CNN, CNBC, Discovery, HBO and Cinemax. Success in this arena as well as the closing of the technological gap between SingTel and StarHub (SingTel has promised to deliver mio TV access to the whole country by 31 July 2010) could potentially mean more pain in store for StarHub.
Recommendations maintained
On balance, we maintain our present recommendations – Buy for SingTel with a target price of $3.51 and Sell for StarHub with a target price of $1.80.
SingTel – CNA
SingTel says Optus notes over-subscribed
Telco SingTel says its wholly-owned Australian subsidiary, Optus, has sold a US$500 million 10-year bond issue.
It says the sale was five times over-subscribed and was made through its unit, Optus Finance, to institutional investors in Asia and Europe.
The notes are denominated in US dollars and carry a semi-annual coupon of 4.625 percent per annum.
SingTel says the note issue follows a successful roadshow in Asia in early October, where it saw extremely strong investor response.
It adds that the bond issue forms part of Optus’ long-term financing strategy, extending the maturity profile of Optus’ debt and adds diversity to its debt structure.
The telco also says the money will be used by Optus for general corporate purposes.
SingTel – BT
SingTel explains share price fall
It could be due to Bharti price drop over competition concern, ASX told
SINGAPORE Telecommunications (SingTel) shares may have fallen victim to investor concerns that heightened competition in India’s telecommunications sector could dent the earnings of Bharti Airtel, its largest overseas associate.
Responding to a query from the Australian Stock Exchange (ASX), SingTel said yesterday: ‘The price change in the securities of the company . . . may be attributable to the fall in Bharti Airtel Ltd’s share price over the last two days on Oct 5 and 6, 2009, possibly in response to news of increased competition in the Indian mobile telecommunications market.’
In its query earlier yesterday, ASX said: ‘We have noted a change in the price of the company’s securities from a close of A$2.63 yesterday to a low of A$2.45 at the time of writing today.’
In Singapore, SingTel shares fell six Singapore cents yesterday to S$3.06.
SingTel has a 30 per cent stake in Bharti, the biggest revenue contributor among the group’s six overseas associates. The Indian telco accounted for 24 per cent of SingTel’s underlying post-tax profits in the first quarter.
To stall new market entrants, Reliance Communications (India’s second- largest wireless operator after Bharti) slashed its long-distance and roaming tariffs on Monday by as much as 50 per cent. Market watchers fear the aggressive cuts could spark a bruising war between Reliance and rivals such as Bharti and third-placed Idea Cellular.
‘Wireless stocks (in India) have fallen 15-20 per cent on heightened concerns on pricing,’ according to Citigroup Investment Research.
‘Assuming that Bharti is forced to retaliate, its average revenue per minute could decline approximately 20 per cent in the next one year, offsetting an estimated 25 per cent subscriber growth and 10 per cent usage growth in FY 2010,’ said DBS Vickers analyst Sachin Mittal in his research note.
With the collapse of its US$24 billion merger plan with South Africa’s MTN Group last week, Bharti is under more pressure to perform locally. The failure of the Bharti-MTN talks also meant that SingTel, which was expected to pump in money to retain its Bharti stake, has been starved of major foreign acquisitions for nearly two years.
Bharti CEO Manoj Kohli said in a Dow Jones report that the company would not respond to its rival’s price cuts and that he was still on the lookout for overseas opportunities. Indian dailies suggested Sri Lankan telco Millicom as a possible target.