Author: tfwee
StarHub – OCBC
May surprise with lower content costs
Big shakeup in Pay TV arena. StarHub Ltd is likely to face a big shakeup in its Pay TV segment after losing the coveted EPL (English Premier League) broadcasts for 2010-2012 seasons as well as the ESPN STAR Sports (ESS) to SingTel from mid-2010. In response, StarHub announced that it plans to lower its sports package pricing (by as much as half) as well as offer two free sports channels of its own to combat subscriber defection. In addition, StarHub believes that the impact of the loss of its premier sports content will remain EBITDA neutral, as it expects just 10% of its 535k subscribers to give up its pay TV services completely, and this will be balanced by lower sports content cost.
May see some unravelling of its Hubbing strategy. However, we are less sanguine. Instead, we believe the loss is probably closer to 15-18% and it will also suffer a double whammy in terms of ARPU. Last but not least, it may also lose some of the stickiness needed to keep its “hubbing strategy” going. As such, we have since adjusted our FY10 estimates accordingly to reflect our concerns (revenue down 12.8%, earnings down 11.4%) in our previous report. Nevertheless, we see room to revise up our estimates should the defection numbers and the drop-off in ARPU is less than what we are expecting.
NBN may boost fixed network segment. On the other hand, the roll-out of the NBN from mid-2010 should give a lift to its fledging fixed network services. Besides winning the OpCo bid through its subsidiary Nucleus Connect (NC), the “open” framework will allow StarHub to reach out to thousands of non-residential buildings that it currently does not service today. It should also be able to enjoy cost savings from the current leasing expenses it needs to pay SingTel. However, StarHub notes that competition may increase ahead of the NBN launch from mid-2010.
Maintain BUY with S$2.29 fair value. Despite the shakeup in the Pay TV segment, we believe that the recent sharp drop in share price has more than taken this into account. In fact, we may get a pleasant surprise from sharply lower content costs from mid-2010 onwards. StarHub has also committed to pay at least S$0.05 as quarterly dividend from 4Q09 onwards and based on our projected free cashflows, we believe that StarHub can easily sustain the same payout in 2010. Maintain BUY with S$2.29 fair value.
SingTel – OCBC
Regional growth story likely intact
Slightly more upbeat outlook. SingTel – after posting an upbeat set of 2QFY10 results recently – has modestly upgraded its guidance for FY10 ending Mar 2010. For Singapore, SingTel expects its EBITDA to grow at low single-digit level (vs. stable previously), likely aided by the continued growth in data services and strong take up of the new Apple iPhone 3GS; but EBITDA margin to decline to around 36-38% from 40% previously. It has maintained other guidance; capex to be below S$800m. For Australia, SingTel expects the operating revenue and EBITDA to grow at low singledigit levels; capex of around A$1.1b; and free cashflow to remain stable. For its associates, SingTel expects both Bharti and Telkomsel (its two largest contributors) earnings to grow in local terms, although it notes that ordinary dividend will be lower.
Game-changer in Pay TV arena. Another noteworthy development would be SingTel’s Pay TV segment – it managed to secure the coveted EPL (English Premier League) 2010-2012 season broadcast rights as well as exclusive sports content from ESPN and STAR Sports (from mid-2010). While we think that it may be a loss leader for SingTel, the added sports content should give its fledging Pay TV business a good boost and also aid its transformation from a plain vanilla telco to a multi-media solutions provider. We believe that having good content may be the key to competing effectively when the NBN rolls out from mid-2010.
NBN may also bring added competition. However, the NBN will also bring additional competition, especially to the corporate realm where it currently has a clear dominance. But we understand that SingTel already has plans in place to retain its existing customers or increase its “stickiness” by offering more comprehensive end-to-end services. We can also expect its recent acquisition of SCS (Singapore Computer Systems) to give it an added edge in the fixed network services segment.
Maintain BUY and S$3.51 fair value. Besides potentially riding on the faster recovery of its regional associates, we believe that SingTel’s growth proposition via acquisitions remains intact – management remains keen to make strategic acquisitions in not only pure carriers but also other segments to boost its service offerings. On the dividend front, we continue to expect SingTel to pay out between 45% and 60% of its recurring earnings as dividend this year. Maintain BUY with a SOTP-based fair value of S$3.51.
M1 – OCBC
Likely key NBN beneficiary
Starting up from ground zero. MobileOne (M1) is likely to be one of the biggest beneficiaries of the NBN (National Broadband Network) initiative when it starts rolling out from mid-2010. While M1 is the fairly new kid on the block, it has been honing its know-how in the residential market by piggybacking on StarHub’s infrastructure to offer cable broadband services. And to fast track its preparation for the commercial sector, M1 acquired Qala – a nine-year old Internet service provider specializing in offering broadband services to business customers – for S$14.9m (may pay a further S$3m if Qala meets certain financial targets up to Jun 2011). According to M1, it intends to use this ready platform to derive synergies and further grow the business as a full service operator.
On more equal footing with peers. Starting from a very low base, we believe that M1 is likely to benefit the most from this as it would be able to offer fixed line broadband services on an equal footing. It will also be able to make its maiden foray into the more lucrative corporate broadband arena with Qala. However, we do believe that the NBN rollout will also introduce an initial period of flux for everyone as price competition (especially in the corporate arena) could hot up. But the NBN also brings new opportunities for M1 – with the ultra-high speed capability of the NBN, the next area that M1 could venture into is pay TV over the Internet, or IPTV, just like what SingTel is offering with its mioTV.
Maintain mobile market share. On its main mobile business, M1’s most important task is to maintain its market share. We believe that the recent deal to distribute the Apple iPhone 3GS by the end of 2009 should allow M1 to reduce its monthly churn as well as arrest the slide in post-paid ARPU as smartphone users tend to subscribe to higher price plans. No doubt that M1 had earlier expected the tough operating environment to remain, we think that M1’s defensive business and strong cashflow generation should allow M1 to continue to pay up to 80% of its recurring income as dividend. As such, we maintain BUY with S$2.12 fair value.
TELCO – OCBC
Value plays with attractive yields
Entering into new era with NBN. Singapore will start rolling out the Next Generation National Broadband Network (NBN) from 2010 onwards as part of its NI2015 Master Plan. SingTel and StarHub will have big roles to play – the former as the NetCo (in charge of rolling out the fiber connections) and the latter as the OpCo (responsible for designing, building and operating the active infrastructure). The broadband connectivity will then be packaged and resold by RSPs – with MobileOne (M1) likely to be one of them – to end users. As such, we expect to see some shakeup in the fixed broadband and network services segments.
Big shakeup in Pay TV arena. Another area of big changes will be in the Pay TV arena, especially in the sports segment. SingTel has recently won the exclusive broadcast rights for the English Premier League for the 2010-2012 seasons; it has also scored a coup by luring ESPN STAR Sports (ESS) from StarHub from mid-2010. But StarHub has responded with two free sports channels of its own and may have cards up its sleeve to combat subscriber defection. And with the NBN and its higher bandwidth capacity, we can expect the content-on-demand market to hot up as well.
Status quo for mobile segment. As for the telcos’ mainstay business, we pretty much expect things to remain status quo. Both M1 and StarHub have recently obtained the “rights” to distribute the Apple iPhone 3GS, breaking SingTel’s near 2-year monopoly on the much-craved smartphone. However, it is unlikely that M1 and StarHub would use the phone to gain market share but probably more to reduce their monthly churns. As such, we do not expect any debilitating price wars. And with the global economy slowly starting to recover, we may also see a modest rebound in core earnings.
Value plays with attractive yields. Stock markets around the world have recovered strongly since hitting multi-year lows in Mar 2009. But with the economies still lagging somewhat behind, significantly higher valuations may be harder to come by in 2010. Instead, investors may be keen to look for value i.e. at laggards with strong fundamentals, and the telcos fit the bill. We see their attractive dividends (mainly M1 and StarHub) as another plus point. We also believe that the rollout of the NBN from mid-2010 will bring new opportunities for all the three telcos. As such, we maintain our OVERWEIGHT rating on the sector.
StarHub – CIMB
Highlights from roadshow
• Maintain Neutral. We brought StarHub on a non-deal roadshow following the release of its 3Q09 results, which left us slightly more positive on the telco. StarHub provided a detailed analysis of the impact from the loss of BPL broadcast rights. We met eight investors. Discussions mostly centred on the loss of the BPL rights, and the ESPN Star Sports (ESS) suite of channels, NGNBN, capital management and revenue growth. StarHub was represented by its CEO, Mr Terry Clontz and its Head of Investor Relations and Corporate Communications, Ms Jeannie Ong. We retain our earnings forecasts, DCF target price (WACC 9.7%) of S$2.15 and Neutral rating.
• Revisiting the BPL and ESS losses. After dissecting its subscribers into various risk profiles, StarHub believes that fewer than 10% of its subscribers would churn. In the worst case, it noted that the BPL and ESS losses would not hurt its EBITDA or free cash flow as subscriber losses would be compensated by lower content costs.
• Negative impact from NGNBN. While StarHub does not see much competition in the residential segment except from M1 because of high international bandwidth costs, we believe M1 will pack a punch with its ability to bundle and cross-sell to its mobile customers. We also believe that the small market would not entice large players. However, the corporate market would likely attract foreign telcos looking to service their MNC clients in Singapore. Overall, we believe NGNBN will be negative for StarHub, with gains from inroads in the corporate segment insufficient to make up for the loss of its duopoly in the residential market.