Month: March 2010
SMRT – Lim and Tan
New Milestone
• The stock hit an intraday high of $2.02 yesterday, before ending below the $2.00 resistance, that being the record closing high and first reached in May '07.
• The April 17th opening of 11 more Circle Line stations (Stages 1&2 / Dhoby Ghaut to Tai Seng) could be a factor, although that's been known for a while now.
• Stages 4 & 5 (12 stations / Caldecott to Harbourfront are scheduled for completion in 2011.
• Other contributing factors behind SMRT's performance include:
– Singapore's continued population growth, now passing 5 mln.
– Strong recovery of tourist arrivals, with 2010 likely to surpass 2007's 10.3 mln peak.
– Continued growth in train ridership (hitting a record high of 47.25 mln in Dec '09), especially relative to bus, which has stagnated, and which explains SMRT outperforming Comfort Delgro, which remains stuck in the $1.50-1.70 range, and despite being the "favorite" of many to be appointed the operator of the new Downtown Line (40 km / 33 stations), scheduled for completion in 2016.
– The refurbishment of the Esplanade Exchange is expected to result in 2000 sq meters of additional rentable space. (Rental income is an increasingly important contributor to SMRT's bottom-line. As at end Dec '09, retail space totaled 29,028 sq meters, vs 23,501 sm three years ago.)
– Likely fare increase when PTC next conducts its annual review in July.
• SMRT is expected to release results for fiscal year ended Mar '10 around Apr 23rd. Final dividend will be no less than 6 cents after the 1.75 cents interim, which would make this the third consecutive year SMRT is paying 7.75 cents per share. At $1.99, yield is still a "decent" 3.9%.
• We are keeping our BUY call. Trailing PE is 16.9x. (Profit for 9 months ended Dec '09 of $140.23 mln was up 13% over the same period the year before.)
SingTel – BT
SingTel's BPL bid cast in a different light
SINGTEL'S BPL (Barclays Premier League) victory is widely seen as the goal it needed to start challenging incumbent StarHub. While that is undoubtedly true for the short term, the ultimate aim behind its willingness to pay top dollar could lie in forcing the policy change that will tilt the balance of pay-TV power in the long run.
And things couldn't have worked out better for SingTel when the government last Friday finally reversed its long-standing position of non-intervention when it comes to pay-TV content.
While the authorities did not prohibit the signing of exclusive contracts, what they did do was to kill off the impetus for signing such agreements in the first place.
A draconian ban would seem far too interventionist under free- market rules, so authorities opted for a softer 'cross-carriage' approach. However, the intention is the same: avoid the bruising bidding war that led to the dramatic escalation of pay-TV prices in recent years.
This could be the exact outcome SingTel was gunning for when it shelled out a reported US$400 million to land the BPL, the crown jewel of StarHub's sports programming for the last decade. The exact price tag for the 2010-2013 BPL broadcast rights remains a closely guarded trade secret but the red camp's bid must have been a lot higher than StarHub's for Premier League officials to make a snap decision without the usual practice of lengthy deliberations.
At that time, market analysts questioned the business sense in SingTel's bidding strategy, while consumers were up in arms over the need to pay for a separate mio TV subscription on top of a StarHub one to watch BPL matches.
However, if SingTel were any less aggressive with its bid, the pay-TV regulatory landscape would likely have maintained status quo in the near term.
In 2006, SingTel tried unsuccessfully to secure BPL rights when preparing its foray into the pay-TV market.
The operator subsequently appealed to the Media Development Authority of Singapore (MDA) to ban exclusive content on the grounds that it was anti-competitive, but the authorities chose not to interfere in such commercial decisions.
The status quo is detrimental to SingTel's pay-TV ambitions in many ways. For years, StarHub has managed to lock in a stable of prized content such as its popular TVB drama serials, AXN and Star World through exclusive agreements, leaving SingTel with little room to manoeuvre in terms of content acquisition. And content providers will also continue to lean towards the incumbent as it has a larger pool of subscribers and therefore can afford to pay more for their programmes.
However, the unwavering stance of non-interference returned to confront MDA when SingTel scored the BPL with an extremely aggressive bid the second time around. Beyond the stated goal of scoring more pay-TV customers, the victory may have also driven home to all the point that being held ransom to exclusive content is detrimental to both industry players and consumers alike.
And while MDA initially refused to budge despite consumer uproar, the impasse over the 2010 FIFA World Cup broadcast rights may have been the straw that busted the camel's back.
This change in policy vindicates SingTel's failed appeal in 2006. In addition, the company also stands to gain the most from the new cross-carriage mandate by a sheer stroke of timing.
The new rule is not being applied retrospectively, meaning SingTel gets to keep its 2010-2013 BPL rights to itself.
Content agreements are getting shorter as the pay-TV industry is undergoing rapid change, so no one wants to be locked into a long-term contract.
The three-year tenure makes SingTel's BPL agreement one of the longest in local pay-TV circles today. With the new rule in place, SingTel can now bid for any content in StarHub's cable TV arsenal once their current exclusivity period runs out, and this timeframe is likely to be under three years.
With StarHub still the market leader (notwithstanding the loss of most of the sports channels), there is definitely more content to poach from the green camp than the other way around. In other words, SingTel can unlock StarHub's content faster than the green camp can reclaim its BPL crown.
All other things being equal, the BPL could be the crucial swing vote in many households. This is because with the new ruling, SingTel's mio TV set-top box can now be used to access both the BPL as well as programmes that were once restricted to StarHub's cable TV platform.
Although the new rule does allow M1 to throw its hat into the pay-TV ring, it will still take some time for Singapore's smallest operator to get acquainted with a new line of business. SingTel, on the other hand, has had more than three years to get its mio TV machinery up and running.
The devil is usually in the details and in trying to foster fairer competition, regulators should consider the implications for current players, especially StarHub, when enforcing the new policy.
As for SingTel, it may just have shown there was indeed much method behind the madness of its all-out BPL offensive.
StarHub – Daiwa
A beneficiary of the revised Media Market Conduct Code
What has changed?
• On 12 March 2010, the government announced a revision to the Media Market Conduct Code that requires pay-TV providers to cross-carry each other's content acquired or renewed on an exclusive basis on or after 12 March 2010.
Impact
• We believe the new regulation could improve the current competitive environment for pay-TV content, as evidenced by the aggressive bidding for the rights to broadcast the BPL by Singapore Telecom (SingTel) (ST SP, S$3.14, 3, TP: S$3.09) in 2009. Pay-TV operators look unlikely to bid aggressively for exclusive content in the future as they can still have the access to this and, at the same time, increase their subsidies to gain market share. We think this means the rising cost of content can be curbed in the long run, but that the competition may shift from exclusive content to customer subsidies.
• The new regulation will not be applied retroactively, and therefore, it should have little impact on StarHub, given StarHub's existing exclusive content is under multi-year contracts (StarHub did not disclose the details of its existing agreements with content partners due to confidentiality).
Valuation
• We have raised our six-month target price to S$2.27 (from S$1.92), equivalent to a PER of 13x on our FY10 EPS forecasts, on a par with the sector average as we believe the new regulation would probably remove the share-price overhang from the content competition driven by SingTel.
Catalysts and action
• Considering what we consider to be its attractive dividend yield of 9.1% for FY10-12, one of the highest in the region, its valuation (a 12.6x PER on our FY10 EPS forecast) looks undemanding to us. Nevertheless, SingTel's aggressive stance in the pay-TV market, which may shift the scope of competition from exclusive content to customer subsidies, could impair the defensiveness of StarHub. We maintain our 3 (Hold) rating, as we see limited upside potential to our target price.
TELCOs – OCBC
Revamp of Pay TV Segment
Significant revamp for Pay TV industry. The Singapore government has significantly revamped the Pay TV industry by requiring Pay TV providers to cross-carry each other's content that is acquired or renewed on an exclusive basis. In short, Pay TV customers will be able to watch all Pay TV content with their preferred operator and need not 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.
Good for Pay TV customers. Overall, we view the latest move as positive for Pay TV customers; it may also translate into lower subscription fees due to less aggressive bidding by the service providers, although we are unlikely to see a drastic reduction as having more content to offer still means higher revenue. Furthermore, the ruling may be a boon to new entrants to the Pay TV market as they can offer their content via existing operators' infrastructure without having to fork out their own hefty capital investments. As advocated before, we believe that MobileOne (M1) will be one such key beneficiary; it will also be able to strengthen its triple-play offering.
Impact slightly mixed for incumbents. But the impact is slightly more mixed for the incumbents, especially SingTel where it had been able to use its strong balance sheet to pay more for exclusive content; with the EPL rights expiring by mid-2012, SingTel may have until then to aggressively expand its fledging mio TV subscriber base from the current 155k users (as of end 2009). For StarHub, the latest move is slightly more positive, 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). Less aggressive content bidding is also expected to reduce its content cost, currently at around 70% of revenue.
Maintain OVERWEIGHT. It is still too early to discern the financial impact as we think that there may still be a lot of logistics that need to be worked out – the devil is in the details. We still like the telcos for their defensive earnings and attractive yields. Maintain our OVERWEIGHT rating.
TELCOs – DBS
Second IPTV success story in Asia?
• MDA will require SingTel and StarHub to share the content, excluding EPL for 2010-12 season.
• In the near term, except football world cup rights, not many channels are up for renewal.
• In the long term,(i) incumbent StarHub would lose its content-advantage offset to some extent by lower content cost,(ii) challenger SingTel would benefit in both content line up and cost,(iii) better case for M1 to enter IPTV business, riding on National Broadband Network (NBN) and shared content.
Content-sharing regulations finally. Media Development Authority (MDA) finally announced mandatory content-sharing for agreements signed after 12 March 2010. MDA would go through industry consultation for content-sharing mechanism and pricing. The timing could pertain to upcoming football world cup rights so that SingTel-StarHub do not engage in overbidding again. Many popular channels may not be up for renewal in the next 2-3 years, so we do not see any major impact in the near term. SingTel would continue to be the exclusive carrier for English Premier League for 2010-12 season as content sharing applies to agreements done after 12 March 2010.
Impact over the long-term. Positive for SingTel. Besides EPL, SingTel does not have much attractive content, as StarHub holds majority of the popular channels exclusively. As and when SingTel secures these channels, it should diminish StarHub's content advantage. In fact, SingTel has a good chance to convert its EPL only subscribers to full subscribers by offering them StarHub's pay TV channels. SingTel's existing mobile and broadband subscribers should be easy targets. Upcoming launch of NBN in 2010 would also help SingTel to improve bandwidth hungry video-on-demand (VOD) and interactive programs. Besides, M1 could also enter IPTV market in order to offer a complete triple-play product. We reckon that Singapore could be the second IPTV success story in Asia after Hong Kong.
Cautious on StarHub. We see StarHub as a victim in (i) the pay TV business due to its loss of its virtual content-monopoly – beginning with EPL loss (ii) the broadband business due to NBN and its network leasing agreement with SingTel till 2015. With fixed network leasing cost, an expected decline in broadband ARPU due to NBN would directly impact bottomline. We prefer M1 to StarHub as (i) M1 offers 16% yield (regular 7%) for FY10F compared to StarHub's 9% yield (ii) M1, being a pure cellular player would benefit more from higher tourist arrival in Singapore. We also like SingTel for its attractive 12x FY11F PER compared to its historical average around 13x.