2010 World Cup joint bid

Joint bid for 2010 World Cup rights

Maintain Underweight on the sector. SingTel and StarHub have announced a joint bid for the 2010 football World Cup broadcast rights to provide higher value to FIFA while ensuring affordable costs to consumers. We are positive on the move as it should prevent an all-out content warfare from hitting telcos’ margins. That said, the devil is in the details and it remains uncertain whether FIFA will accept the bid. This piece of news does not change our UNDERWEIGHT position on the sector as we are concerned about myriad sector risks. M1 (target S$2.07) remains our top pick with a NEUTRAL rating for its capital-management potential and greatest upside from NGNBN. StarHub also remains a NEUTRAL (target S$2.15) for its attractive dividend yields of 10-11%. SingTel is an UNDERPERFORM (target S$3.30) on our concerns over escalating content costs in Singapore and competition in India and Australia.

The news

StarHub and SingTel announced that they have put in a joint bid for the 2010 football World Cup broadcast rights. While attempting to provide a much higher value to FIFA, the telcos said their bid also tries to ensure programme affordability for consumers. While no details have been revealed, the announcement included the statement that the price offered to FIFA “would sacrifice all World Cup margins for both SingTel and StarHub while keeping the price affordable for consumers”. The two companies have yet to reach an agreement with FIFA but will continue to negotiate to reach one.

Comments

We are positive on the joint bid. The joint bid should be positive for both SingTel and StarHub as it would prevent an all-out bidding warfare for this piece of content. While the costs of rights have escalated, the damage to margins would be less severe as the costs would be shared by two non-competing parties. Our interpretation of the press release is that the content would not be loss-making but would probably be neutral for earnings.

For StarHub, this joint bid would stem concerns about more loss of content although StarHub would not have exclusivity to the World Cup. For SingTel, it would represent another feather in its sports-programming cap.

Devil is in the details. That said, we believe practical obstacles may lie in the way, recalling the 2010-2012 Barclays Premier League (BPL) rights when a joint bid was scuppered at a very late stage. We see two key hurdles, namely from: 1) FIFA’s willingness to accept such a proposal; and 2) finding a way to split the matches between the two entities if they are not able to simulcast them at the same time.

Could it signal future content sharing? The collaboration between StarHub and SingTel raises the question of whether more expensive content may be shared in the future. Moreover, other compelling content is negotiated directly with content owners and not on an auction basis like the BPL rights and World Cup rights. Finally, StarHub may be rather loathe to lose exclusivity for its other prime content which would expire from end-2011 onwards as a lack of exclusivity would devalue its hubbing proposition and strip StarHub of differentiation with its larger rival.

Valuation and recommendation

Maintain UNDERWEIGHT on the sector. While the joint bid is deemed positive for StarHub and SingTel, this piece of news does not change our negative position on the sector, which is grappling with rising content costs, pressure on broadband ARPUs and escalating device subsidies. We continue to advocate M1 as our top pick with an unchanged NEUTRAL rating and DCF-based target price of S$2.07 (WACC 9.5%) for its capital-management potential and greatest upside from NGNBN.

SingTel responds with new iPhone plans

Maintain Underweight on Singapore telco sector. Two days after M1 and StarHub launched their iPhone packages, SingTel has countered the competition by cutting prices and increasing its data bundles. SingTel has mostly matched M1’s handset prices (already more aggressive) by adjusting prices by -29% to +11%. SingTel also sharply increased its data bundles to match those of its rivals, but did not tweak its monthly subscription fees. All in all, we do not expect SingTel’s counter-measures to spark an escalation in the subsidy war. We remain UNDERWEIGHT on the sector, given myriad risks from competition and our house preference for cyclical sectors. Our top pick is still M1, rated a NEUTRAL with an unchanged DCF-based target price (WACC: 9.5%) of S$2.07 as we prefer it for its capital-management potential in 2010 and greatest potential upside from NGNBN.

Comments

Matching its rivals. Two days after M1 and StarHub rolled out their iPhone packages, SingTel countered the competition by cutting the prices of its iPhones and increasing its data bundles. The key changes are:

• SingTel has mostly matched M1’s (already more aggressive pricing) handset prices by adjusting its prices by -29% to +11%.
• SingTel also sharply raised its data bundles from 0.5GB-3GB to 12GB-30GB to mostly equal the offerings of M1 and StarHub. M1, in retaliation, nudged up its lowest- and mid-tier data bundles from 10GB to 12GB to match those of SingTel.
• But SingTel did not adjust its monthly subscription fees, nor did it change the free local calls and SMS in its old plans which its rivals had matched.

All in, SingTel’s revised plans are not much different from those of its competitors andwe do not expect its rivals to further up the ante.

Valuation and recommendation

Maintain UNDERWEIGHT with M1 as top pick. While a subsidy war does not appear to be brewing, we retain our UNDERWEIGHT position on the sector as we see myriad risks relating to competition and given our house preference for cyclical sectors. Among the risks are further ARPU erosion in broadband for SingTel and StarHub, higher content costs at SingTel, and risks of losing more compelling content at StarHub.

We maintain M1 as our top pick in the sector for its capital-management potential and upside from NGNBN. We continue to rate it a NEUTRAL with an unchanged DCFbased (WACC: 9.5%) target price of S$2.07.

StarHub is our next preferred stock, similarly rated a NEUTRAL with an unchanged DCF-based target price of S$2.15 (WACC: 9.7%) as we like its attractive yields and strong free cash flow yields of 10-11%, though offset by a lack of re-rating catalysts and a likely erosion of its residential broadband business.

SingTel is our least preferred stock due to expected weaker margins in Singapore and concerns over competition in India and Australia. We rate it an UNDERPERFORM with an unchanged sum-of-the-parts target price of S$3.30.

M1 and StarHub launch iPhone plans

iPhone pricing unveiled

Maintain Underweight on telco sector. Both M1 and StarHub announced they will be launching iPhones on 9 Dec. A quick scan shows that both have priced their phones below SingTel’s pricing. However, the telcos are rather rational by not straying too far from the incumbent’s pricing, thereby averting an all-out subsidy war, which had been our earlier concern. M1’s plans are a little more aggressive. We believe M1’s and StarHub’s margins will be depressed in 4Q09 and 1Q10 by the launch of the iPhones, which coincides with festivities. We remain UNDERWEIGHT on the sector given myriad risks and our house preference for cyclical sectors. Our top pick is still M1, rated a NEUTRAL with an unchanged DCF-based target price (WACC: 9.5%) of S$2.07, as we believe there is capital-management potential in 2010 and M1 has the greatest upside from NGNBN.

Comments

Fairly rational pricing. Both M1 and StarHub announced they will be launching iPhones on 9 Dec, well ahead of the peak sale period for Christmas. A scan of all three plans indicates that both StarHub and M1 have stayed fairly rational, which assuages our earlier concern that an all-out subsidy war could erupt. The handset pricing only varies by S$40 at the most, among the most comparable plans, with M1 being more aggressive, and very little differentiation in monthly subscription fees.

As an example, M1 offers the iPhone 3GS 32 GB for S$0-658 with a monthly commitment fee of S$36-198. StarHub offers the same phone at S$0-668 with a monthly commitment fee of S$38-205. SingTel is already offering the same device for S$0-S$678 with a monthly commitment fee of S$39-205.

M1 is the most aggressive, excluding its iPhone 3G 8 GB plan, offering the cheapest handset pricing and lowest monthly commitment fees. It is also the only operator to offer true unlimited plans providing unlimited voice/video calls, SMS/MMS and data surfing. M1 also offered the most data capacity until StarHub upped the ante 12 hours after StarHub’s initial launch by increasing the initial 1GB bundle to a 12 GB bundle
across three of their four plans.

We are not surprised by M1’s aggression as it has the smallest subscriber share and would want to make a bigger splash to lure more subscribers. During our recent nondeal roadshow with M1, we understand that about 10K of its existing subscribers are interested in migrating to the iPhone plans.

Limiting churns but hurting margins. While we see the iPhones as more of a defensive move by the two smaller rivals to cling on to subscribers, the iPhones should also help them acquire new customers and stimulate ARPU. However, the downside is that subscriber acquisition and retention costs (SARC) are set to rise and dent margins as marketing expenses rise in tandem.

We note that SingTel’s EBITDA margin fell 2.6% pts in 2QFY09 when it launched the original Phone 3G in Aug 08 and slipped 3.2% pts in Jul 09 when it introduced the iPhone 3GS. SARC rose to S$306 in 2QFY09 from S$256 in 1QFY09 following the launch of the iPhone 3G and to S$327 in 2QFY10 from S$304 in 1QFY10 when it launched its iPhone 3GS in Jul 09.

How will SingTel react? The thing to watch is counter-measures unveiled by SingTel. During its 2QFY10 conference call, SingTel said it would make both price and non-price responses such as offering more applications and improving its customer service quality to maintain its lead. Given still-fairly rational pricing, we do not expect SingTel to react aggressively when it launches a new iPhone plan this weekend.

Valuation and recommendation

Maintain UNDERWEIGHT with M1 as our top pick. While a subsidy war does not appear to be brewing, we retain our UNDERWEIGHT position on the sector in view of myriad other risks relating to competition and also our house preference for cyclical sectors. Among these risks are further ARPU erosion in broadband for SingTel and StarHub, higher content costs at SingTel, and risks of losing more compelling content at StarHub.

We maintain M1 as our top pick in the sector for its capital-management potential and upside from NGNBN. We rate it a NEUTRAL with an unchanged DCF-based (WACC: 9.5%) target price of S$2.07.

StarHub is our next preference, rated a NEUTRAL with an unchanged DCF-based target price of S$2.15 (WACC: 9.7%) as we like it for its attractive yields and strong free cash flow yields of 10-11%, offset by a lack of re-rating catalysts and a likely erosion in its residential broadband business.

Finally, SingTel is our least preferred stock due to expected weaker margins in Singapore and concerns over competition in India and Australia. We rate it an UNDERPERFORM with an unchanged sum-of-the-parts target price of S$3.30.