Category: StarHub
StarHub – Kim Eng
It’s Been A Stellar Ride
Time to say goodbye. Our long-standing buy call on StarHub has been rewarding. However, it is time to say goodbye and we advise clients to take profit. The stock has raced to an all-time high amidst the current risk-off environment and its dividend yield has compressed to the lowest level since listing. Going by our DDM model, the share price has already discounted a 20% rise in dividends, but our original expectations of higher dividends may be dashed by an upcoming 4G spectrum auction in 2013. Management has also indicated there will be no capital management or reduction initiatives. Assuming dividends stay flat at SGD0.20 a share, our DDM-derived target price is SGD3.04 or 15% below the current level. SELL into the current strength.
Stock is overvalued if dividend stays put. StarHub has almost reached our DDM-derived TP of SGD3.64, which had assumed a 20% rise in annual dividends to SGD0.24 a share. However, the 4G spectrum auction in 2013 may lead to a rise in cash commitment next year, which could reduce the company’s willingness to increase dividend payout. If dividends stay put at the current SGD0.20 a share, the stock is now overvalued, with a DDM-derived TP of SGD3.04.
Spectrum cost to push up 2013 cash needs. Using past auctions to provide a pricing benchmark, StarHub may need to pay SGD110-131m for refarmed 4G spectrum. An auction is likely to be held in 1H 2013. This could bump up 2013 cash requirements by 43-51% and push 2013 net debt/EBITDA from 0.63x to 0.78-0.81x. While this should not endanger its current SGD0.20 DPS, it may undermine our original thesis that StarHub can afford to increase its dividends.
Absolute valuations also difficult to justify. At the current level, StarHub is yielding just 5.6% on its ordinary dividend, the lowest since it was listed in 2004 and started paying dividends in 2005. The spread between dividend yield and the 10-year Singapore government bond yield has also narrowed to its tightest level yet, a mere 400bp, since the bond itself was issued in 2007. Dividend yield is also barely hedging against domestic inflation of 5% (as at May 2012).
TELCOs – DBSV
Regulator tightens belt to press the pedal on fiber
What's new?
Singapore telecoms regulator IDA is raising the weekly fiber installation capacity to 3,100 per week from Aug 2 onwards. This is up 30% from 2,400 earlier and exceeds our forecast of a 15% rise highlighted in our report on SingTel released on 2nd July. A dynamic mechanism to raise capacity in line with demand has also been put in place.
200 installations out of the quota will be for commercial buildings. This is the most attractive pie for retail service providers as each commercial connection commands much higher ARPUs than residential connections. IDA wants OpenNet (the fiber backbone provider) to offer an activation period of 10 days from its side, unless building owners cause a delay in wiring up their buildings.
Our view
Slightly negative for SingTel but positive for others. The commercial broadband market represents the biggest slice of the market, accounting for an estimated 60% of the total, with residential accounting for less than 40%. SingTel is the leader in the commercial space with an estimated 80% share of the commercial broadband market while StarHub has less than 20% due to difficulties in accessing commercial buildings. SingTel has differentiated itself on the basis of its strong managed service portfolio, cloud computing and strong IT support. However, SingTel's market share and margins may still feel the heat as retail service providers offer services to price-sensitive small and medium (SME) customers. SingTel may barely achieve stable Singapore EBITDA in FY13F compared to our expectations of 3% growth. Ongoing re-structuring and its mobile advertising business are other cost pressures in the near term.
S-curve ahead as Singapore lags Malaysia in fiber adoption. Fiber adoption stands at 12% of rollout in Singapore versus 25% in Malaysia, due to the various bottlenecks the regulator IDA has identified and wants to quickly resolve. Compared to only 99k fiber subscribers in Singapore at the end of 2011, we project at least 150K subscribers to be added each year for the next three years in line with the "S curve".
No change to our TP and recommendations on stocks under our coverage.
TELCOs – DBSV
Regulator tightens belt to press the pedal on fiber
What's new?
Singapore telecoms regulator IDA is raising the weekly fiber installation capacity to 3,100 per week from Aug 2 onwards. This is up 30% from 2,400 earlier and exceeds our forecast of a 15% rise highlighted in our report on SingTel released on 2nd July. A dynamic mechanism to raise capacity in line with demand has also been put in place.
200 installations out of the quota will be for commercial buildings. This is the most attractive pie for retail service providers as each commercial connection commands much higher ARPUs than residential connections. IDA wants OpenNet (the fiber backbone provider) to offer an activation period of 10 days from its side, unless building owners cause a delay in wiring up their buildings.
Our view
Slightly negative for SingTel but positive for others. The commercial broadband market represents the biggest slice of the market, accounting for an estimated 60% of the total, with residential accounting for less than 40%. SingTel is the leader in the commercial space with an estimated 80% share of the commercial broadband market while StarHub has less than 20% due to difficulties in accessing commercial buildings. SingTel has differentiated itself on the basis of its strong managed service portfolio, cloud computing and strong IT support. However, SingTel's market share and margins may still feel the heat as retail service providers offer services to price-sensitive small and medium (SME) customers. SingTel may barely achieve stable Singapore EBITDA in FY13F compared to our expectations of 3% growth. Ongoing re-structuring and its mobile advertising business are other cost pressures in the near term.
S-curve ahead as Singapore lags Malaysia in fiber adoption. Fiber adoption stands at 12% of rollout in Singapore versus 25% in Malaysia, due to the various bottlenecks the regulator IDA has identified and wants to quickly resolve. Compared to only 99k fiber subscribers in Singapore at the end of 2011, we project at least 150K subscribers to be added each year for the next three years in line with the "S curve".
No change to our TP and recommendations on stocks under our coverage.
StarHub – DMG
Keeping Its Gun Powder Dry
We hosted Starhub at our recent Asean Conference in Singapore where the telco recorded a good number of meeting requests. Discussions were centered on the upcoming bid for the 2013-2016 broadcasting rights to the BPL, capital management and data monetization efforts. There were no major surprises with management reiterating the need to maintain sufficient cash buffer in view of the uncertain industry dynamics. Starhub’s share price has re-rated on yield attraction but we think further upside may be capped by concerns over margin dilution from the BPL and steep device subsidies. We remain NEUTRAL on the stock but up our FV to SGD3.30 from SGD2.80 after lowering our WACC.
Sustainable dividends. Starhub prefers to grow its dividends progressively as to provide sustainable returns over the longer-term. While management acknowledged the potential for capital management due to the under-leveraged balance sheet, it prefers to keep its ‘gunpowder’ dry due to (i) regulatory uncertainties, (ii) the upcoming bid for the BPL and (iii) the intense mobile competition where device subsidies remained high. The telco has reaffirmed its 20cents/share dividend commitment for FY12 which translates into a decent net yield of 6%. Starhub continues to be the only telco that pays out quarterly dividends.
Pricing data the way it should be. We think it is a matter of time before Starhub responds to Singtel’s earlier move to lower its data cap on its 3G plans to better monetize data traffic. The incumbent’s move has raised the ire of some of its high usage data subscribers, benefitting Starhub and M1. We think Starhub will be in a better position to introduce a new set of data plans given that is already capitalizing on the lower data cap on its multi-SIM plans which have been well received. We expect the group to expand its LTE coverage to more areas outside of the CBD in 2013.
BPL- the sky is the limit? Starhub is evaluating all options including submitting a joint bid for 2013-2016 BPL season which starts in September. We expect the group to bid rationally, having learnt from the bitter experience in 2009 where it lost out to Singtel and with the benefit of the cross carriage ruling which requires that all content secured on an exclusive basis be shared. In the worst- case scenario that Starhub is not able to procure the BPL content directly (Singtel maintains exclusivity), it is still able to offer BPL to its pay-tv customers via the cross carriage arrangement with Singtel.
Domestic M&As. Starhub does not rule out domestic M&As if the business proposition makes sense and is synergistic to its existing quad play model. We think some acquisition activities may present itself within the broadband segment and content space, allowing Starhub to enhance its market position and competitive advantage.
TELCOs – Kim Eng
Let the BPL Money Games Begin
Buy StarHub to hedge rising cost of BPL TV rights. British soccer fans have just agreed to hand over GBP3b to the Premier League, the richest soccer league in the world, as the 2013-2016 UK TV rights were recently sold at a 71% premium over the last three seasons. In Singapore, soccer fans will have no choice but to tighten their belts yet again. However, we think StarHub will be the ultimate winner, even if SingTel decides to throw caution to the winds and bids aggressively. BUY StarHub to hedge against the rising cost of watching your favourite team; SingTel remains a SELL.
BPL scores huge TV rights win at home. The world’s richest soccer league, Premier League, just got a billion pounds richer. British pay TV broadcasters BSkyB and BT recently agreed to fork out GBP3.04b over the next three years for the UK domestic live TV broadcast rights for the 2013-2016 seasons, a 71% rise over the cost of the rights for the 2010-2013 seasons. BPL stars Yaya Toure and Mario Balotelli (despite his goal drought) can look forward to even more lavish pay hikes.
What will happen to Singapore? The worst case scenario is both telcos and Premier League walk away from the negotiation table, which we think is unlikely. Given the presence of cross-carriage laws this time round, it is more plausible that Premier League will allow a joint bid between SingTel and StarHub that will result in it receiving a sum more than the estimated SGD425m SingTel paid for the 2010-2013 seasons.
No good news for soccer fans. Whichever the scenario, there is unlikely to be any good news for soccer fans; just various degrees of bad. Assuming a joint bid is possible and a 30% rise in TV rights cost over the 2010-2013 seasons, as mooted in Hong Kong-based reports, our best case scenario suggests that subscribers will still need to pay between SGD27 and SGD35 more a month to watch BPL, which we think is still reasonable.
Odds are with StarHub. In the final analysis, we think StarHub will watch the dollars and cents and refrain from harming its generous dividend policy by bidding too aggressively, even if it does bid jointly with SingTel. If SingTel decides to be as aggressive as it was in 2009 and clinches the rights to the three seasons, the cross-carriage law will work to StarHub’s advantage. In such a tactical strategy game, we think the odds (and investors’ favour) are with StarHub.