Author: tfwee
StarHub – BT
What the OpCo win really means for StarHub
IT WAS a case of drinking on the job with champagne flowing freely at StarHub Centre all afternoon as staff celebrated their OpCo (Operating Company) triumph last Friday. Some market analysts also expect investors to add icing to the cake through a near-term rally on the back of the news that StarHub has been anointed by the government to operate Singapore’s upcoming high-speed fibre-optic network.
While any success is undoubtedly positive, the key question to ask when the confetti settles is: just how significant is this victory and what are the implications for StarHub’s lucrative broadband businesses?
From the onset, it would seem StarHub picked the short stick in the long-drawn fight for a stake in Singapore’s new digital superhighway.
To recap, StarHub last week won the bid to operate the Next-Gen NBN (National Broadband Network) and wholesale bandwidth to companies that are keen to provide Internet-related services using the new pipes. To fulfil this obligation, it will establish a new company called Nucleus Connect. Last September, a SingTel-linked group called OpenNet won the government tender to build the fibre-optic network.
New expressway
To put it plainly, OpenNet’s role in the project is akin to a construction company tasked to build a new expressway. Once completed, it leases the highway to StarHub, who then carves out lane markers and puts in place toll booths for charging, say, logistics companies who plan to use the new infrastructure to deliver goods.
While it seems like a win-win case for both, the key difference is that StarHub’s returns hinge on the number of companies that would be willing to use the expressway. While a vibrant broadband market is the desired outcome, it remains to be seen if Singapore’s small market size can support a large service provider crowd.
Furthermore, existing telcos – StarHub, SingTel and M1 – can cross-subsidise their Internet ventures with their sizeable mobile revenue streams, making it difficult for a newcomer to compete from scratch.
Unlike StarHub’s OpCo venture, OpenNet is assured of a stable stream of recurring income from construction and leasing. And SingTel, in particular, stands to land an additional billion-dollar windfall as it will be hiving off the bulk of its existing Internet assets to OpenNet to speed up the construction timeframe.
This masterful stroke allows the operator to pocket nearly $60 million annually and, at the same time, divest infrastructure that is set to lose its strategic value. Owning Internet pipes in future will not be advantageous as the government’s ‘open access’ mandate forces the owner to allow any company to tap the network at a universal price.
As the OpCo, StarHub will be left with the dilemma of deciding the fate of its current Internet assets. The company invested nearly $600 million a decade ago to roll out the cable network it needed for providing pay-TV and broadband access.
It will now have to incur heavier costs from maintaining two separate networks for the next five years at least, since the shelf life of fixed-line assets is usually two decades or more. At the same time, the minting of the NBN in late 2012 threatens to hasten the erosion of StarHub’s broadband margins.
Once the NBN is operational, StarHub can be expected to migrate its higher-end customers to the new ultrafast network, while using its current cable platform to offer cheaper, lower-tier Internet access. While the same is true for SingTel’s broadband portfolio, the red camp would have been compensated in part through the asset divestment.
Road hump
Another road hump stemming from the OpCo contract is that it is exclusive to the StarHub unit only for the first five years, or until it has claimed a 25 per cent broadband market share. After that, other companies can technically be allowed to apply for an OpCo licence.
For StarHub, the priority now is to start nailing down the types of new services that can be powered by the NBN since it will be most well-versed with the mechanics of how it operates. In particular, business offerings – be it hosting services for gaming companies, or high-speed disaster recovery – could be considered since companies are the likely early adopters of breakneck access speeds.
While the NBN presents fresh challenges, it will also allow StarHub to strengthen its corporate push – a segment which SingTel has been aggressively branching into this past year. The difference this time round is that both companies will be competing on a level playing field, so it truly becomes a case of the best man carrying the day.
ComfortDelgro – DMG
Earnings prospect remain bright
The weakness in crude oil prices is a positive for ComfortDelgro’s operating margin. Crude oil prices has trended below US$50/bbl in 1Q09, sharply lower than the high of US$134/bbl in Jun 08. This will lower operating costs and widen ComfortDelgro’s operating margins.
Singapore rail ridership seen to do well. Whilst Singapore bus ridership was flat YoY for the first two months of 2009, rail ridership rose 8.4%. We have conservatively assumed flat 2009 bus ridership and a respectable 7.4% rail ridership growth. Management indicated that its Singapore fleet of 15 thousand taxis has a low idle rate of 1%. For the 300 odd taxis mothballed in the LTA yard (which will be exempt from special diesel taxes), none of them are ComfortDelgro taxis.
Looking for more acquisitions in Australia. Australia accounted for 7% turnover share in 2008. The Australian cost-plus model is commercially attractive – increases in costs eg fuel and labour can be passed on to the government with a short one-month lag. This adds more certainty to margins. Growth in Australia is likely to come from acquisitions. ComfortDelgro will consider further acquisitions if the IRR is at least 7%.
Scope to expand in China. China accounted for 8% turnover share in 2008. ComfortDelgro currently operates in 12 Chinese cities, with Beijing taxi operations accounting for a sizeable 48% revenue share. ComfortDelgro runs 5.1 thousand taxis in Beijing. There is scope to expand the taxi operations in China via acquisitions of more taxi licences. ComfortDelgro sees China as
attractive given its operating margins of 20%+ and ROA of 8-9%.
Our S$1.78 target price is derived from sum-of-the-parts valuation. Share price catalysts include our forecast 32% recurring net profit increase for FY09, and an attractive FY09 dividend yield of 4.5% (based on a 55% payout ratio).
StarHub – OCBC
Wins NBN OpCo Bid
Wins NBN OpCo Bid. StarHub announced Friday that it has been selected by the Infocomm Development Authority of Singapore (IDA) to build and manage the OpCo (Operating Company) for the Next Generation National Broadband Network (NBN). StarHub plans to invest S$100m to set up a wholly-owned subsidiary Nucleus Connect (NC) to design, build and operate the active infrastructure of the NBN. In addition, NC, which is expected to start commercial operations in 1Q10, is also committed to attracting overseas online service providers to host their content in Singapore.
S$1b investment over 25 years. According to StarHub, NC expects to spend about S$1b for the active network over the 25-year period of the license, or around S$40m per year. However, NC is eligible for the government grant of up to S$250m from IDA to defray part of the investment, which we understand will also be dispersed to NC over a period of time. Based on our estimates, we do not believe that StarHub will have any issues funding the S$100m NC investment using its internal funds.
Wholesale pricing ranges from S$21-121 per user. Meanwhile, the IDA has revealed that one of the key factors behind StarHub’s victory was its “attractive” wholesale pricing. Media reports quoted the IDA as saying NC will charge companies (RSPs or Retail Service Providers) S$21 a month for a 100Mbps residential Internet connection and S$121 for a 1Gbps link; a 100Mbps non-residential connection is priced at S$75 a month. The IDA added that NC’s proposed wholesale pricing cannot be raised for the first six years but it can be brought down. Earlier, the NetCo (Network Company) – won by a consortium that includes rival SingTel – said it would offer wholesale prices of S$15 per month per residential fibre connection and S$50 per month per non-residential fibre connection to operating companies.
No near-term impact. In the near-term, we do not see any impact on its earnings – we expect meaningful OpCo contribution to come in from 2011 onwards; we raise our FY10 estimates by less than 0.5%. We also do not expect any change in its capex spending this year although we can expect an increase of S$30m from 2010 onwards; and we can expect a small increase in debt funding somewhere down the road. Nevertheless, based on our DCF valuation model, the win is positive for StarHub and that bumps up our fair value from S$2.78 to S$2.88. Maintain BUY
Starhub – BT
SINGAPORE – Singapore awarded StarHub the contract to develop and operate a nationwide broadband network that will provide homes and offices with Internet connections of up to 1 gigabyte per second.
Under the terms of the agreement announced on Friday, StarHub, Singapore’s number two telecom firm, will become the wholesale provider of broadband access to companies offering Internet access as well as other services such as videoconferencing and high-speed data transmission.
The other contenders for the contract were Singapore Telecommunications, MobileOne and a consortium led by Cisco Systems .
In September last year, Singapore gave the contract to develop the ‘passive infrastructure’ for its nationwide broadband network to a consortium led by Canada’s Axia Netmedia. — REUTERS
M1 – BT
M1 to try out mobile payments
Telco partners Citibank and Visa in three-month pilot scheme
MOBILEONE has become the latest telco to dip its toes into the nascent market for mobile payments, with the launch of a trial to allow customers to tap-and-pay for everyday purchases with their handphones.
The trial, which starts in May, in partnership with Citibank and Visa, will allow 300 Citi M1 Platinum cardholders to whip out their phones instead of the usual plastic to pay for items at more than 750 retail outlets.
The payment function relies on near-field communications (NFC) – the same technology used on trains and buses to allow passengers to tap and pay for fares.
In the MobileOne trial, participants will be issued with an NFC-enabled handset that has been pre-loaded with Visa’s contactless payWave application.
The software links the phone to a Citibank M1 Platinum card account and allows the device to transmit this information to special payWave terminals at participating outlets such as The Coffee Connoisseur, Mrs Fields and Gramophone.
The Visa payWave system is touted to be able to halve transaction times and eliminates the need for a cardholder’s signature, making it suitable for making small, everyday purchases such as a cup of coffee, movie ticket or CD.
During the pilot scheme, cardholders can only use their handsets to pay for items costing less than $100. The same limit is being imposed on payWave transactions on the One Card by United Overseas Bank, the first local credit card to support Visa’s contactless payment technology when it debuted in 2007.
M1, Citibank and Visa are hoping to use their three-month experiment to assess the viability of phone payments in Singapore, as well as consumer preferences when using the tap-and-go system.
As a sweetener to get participants to open their mobile wallets, they will be allowed to keep their phones after the pilot scheme if they carry out more than eight transactions a month. The cost of the trial has not been disclosed.
The promise of phone payments has seen a renaissance in recent years as a result of explosive handset growth and the advent of technologies such as NFC.
With a sky-high mobile penetration rate of 131 per cent, Singapore is seen as a prime candidate for seeding mobile wallet projects.
‘This is Singapore’s first pilot of mobile payments linked to a credit card,’ John Denhof, Citibank Singapore’s business director of credit payment products, told reporters at a briefing yesterday.
The island’s top two telcos have experimented with NFC payment options in the past. StarHub, for example, partnered EZ-Link in 2007 to test the feasibility of using phones to pay for bus and MRT rides.
And in the same year, Singapore Telecom launched an NFC trial with Nets (Network for Electronic Transfers) which allowed phone payments at 500 participating outlets. However, these companies have not taken the next step of large-scale commercial rollout.
‘We want to be ahead of the curve when it gets adopted,’ Mr Denhof said.