Category: StarHub
StarHub – DBS
Expectations too high!
• We estimate an adverse impact of 5%/10% and 2%/3% on FY10F/11F earnings due to EPL loss
and expiry of job credit scheme respectively.
• Our FY10F/11F earnings are 8/11% below consensus
• We doubt if free cash flow can sustain 20 cents DPS in FY11F. Maintain FV with revised TP of
S$2.06
Why we differ? Contrary to the street’s expectations of EPL loss being EBITDA neutral, we estimate negative impact of at least S$17m/S$34m on FY10F/11F earnings. Our estimate of households leaving StarHub broadband is higher than street expectations. We estimate 14% of StarHub broadband subscribers may leave StarHub for SingTel and M1 within a year. Secondly, street may not have captured potential loss of mobile subscribers due to the “hubbing” proposition, which we think cannot be ignored. We estimate over 3% of post-paid mobile subscribers may leave StarHub in a year. We look forward to FY10F guidance from the incoming CEO Mr. Neil Montefiore on 4th Feb with 4Q09F results briefing.
Can free cash flow sustain 20 Scts DPS beyond 2010? Management has guided for annual 20 Scts DPS, which exceeds its est. FY09F EPS, as StarHub does not have to pay cash tax till late 2010. However beyond 2010, in our view, 20 Scts DPS could be sustained only by raising debt.
Our FY10F/11F earnings are 8%/11% below consensus. We are mindful of higher depreciating charges due to OpCo related capex in FY10F. We would value the company on 12x FY10F PER, at 10% discount to M1’s 13x target PER, due to (i) M1’s lower net debt to EBITDA of 0.7x compared to 1.0x for StarHub, and (ii) M1’s stable earnings prospects compared to declining earnings for StarHub.
TELCOs – BT
A tale of two halves for local telco sector
Operators come to life in second half after six-month hibernation
2009 has turned out to be a tale of two halves for Singapore’s telecommunications sector, with operators stirring to life in the second half after a six-month hiatus. And the action can only get more sizzling as the key players brace for heightened competition with the arrival of the new nationwide, ultra high-speed broadband network in 2010.
In the first six months of this year, Singapore Telecommunications, StarHub and MobileOne were mostly in hibernation, relying on a mix of tight cost controls and recurring subscriber revenues to tide them through the global downturn.
While many companies struggled, the three operators proved their mettle by delivering an encouraging set of first-half results in spite of the economic difficulties.
StarHub’s net profit rose 11 per cent during the period to $160.3 million, while M1’s net income fell marginally by 0.3 per cent to $78.9 million.
SingTel’s profit for its fiscal fourth quarter ended Mar 31 declined 17 per cent due to its overseas exposure. However, it rebounded strongly three months later with a 7.7 per cent rise in net income to $945 million for its first quarter ended June 30.
‘The biggest highlight was basically being able to grow the revenue from our Singapore business, our Ebitda (earnings before interest, tax, depreciation and amortisation) and free cash flow,’ said Allen Lew, CEO of SingTel Singapore.
While the telco front was starved of major competitive strides in the first half, one operator did ring in major changes to its management deck from the get go. In January, M1’s CEO of 12 years, Neil Montefiore, announced his resignation. Its long-serving chairman, Lim Chee Oon, also stepped down two months later.
M1’s chief financial officer Karen Kooi eventually took over the reins in April, becoming the second local telco CFO to be promoted to the top job after SingTel’s Chua Sock Koong. Teo Soon Hoe, Keppel Corp’s senior executive director and group finance director, took up the post of M1 chairman.
The first half also saw the start of another round of merger talks between SingTel’s Indian associate Bharti and South Africa’s MTN Group but regulatory hiccups caused the deal to be scuppered a second time.
But StarHub’s attempt at business diversification eventually succeeded as its subsidiary Nucleus Connect clinched the government’s OpCo (operating company) tender to operate the Next-Gen NBN (National Broadband Network), the country’s new fibre-optic broadband superhighway. ‘It is a milestone for us to win the bid to build and manage the OpCo for the Next-Gen NBN. This is the more exciting and innovative part of the Next-Gen NBN infrastructure,’ said StarHub spokeswoman Jeannie Ong.
Past the half-year mark, signs of economic recovery reignited the competitive flames among the three warring factions.
SingTel started the ball rolling by retaining its exclusive rights to sell the latest version of Apple’s coveted touch-screen handset – the iPhone 3GS – in July.
In the same month, StarHub announced that it had poached Mr Montefiore to succeed its outgoing chief Terry Clontz. Mr Clontz will retire at the end of this month.
M1, on its part, signalled its intention to branch into the broadband market by buying Internet service provider Qala for $14.9 million in September.
A month later, any uncertainty surrounding the change-of-guard at StarHub was made worse when SingTel managed to score the broadcast rights to the English Premier League (EPL) for its mio TV platform in October.
‘I have not seen so many people talk about mio TV until we won the EPL. The ability to bring mio TV from being a niche product to a must-have product is significant,’ SingTel’s Mr Lew said.
‘While we may not have the rights to air the EPL for the next three seasons, it is not game over for us. StarHub still has a wide array of content,’ responded StarHub’s Ms Ong.
While ‘robbed’ of the crown jewel of its cable programming, StarHub – along with M1 – finally managed to land the star of SingTel’s handset portfolio, the iPhone 3GS. The device, which went on sale at StarHub and M1 shops earlier this month, sparked off one of the fiercest mobile skirmishes in local history. StarHub upped the data bundle for its basic iPhone plan tenfold in a day in response to M1’s generous subscription packages. SingTel reacted the next day by doing the same.
Such tit-for-tat battles will likely continue into 2010 when the Next-Gen NBN starts to come online from the end of the first quarter, market watchers say.
‘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,’ said OCBC research analyst Carey Wong.
StarHub, on the other hand, will finally get a chance to provide Internet connectivity to corporate customers, while SingTel can now replace its aging copper cables with high-speed fibre-optic pipes, he said.
SingTel, StarHub – BT
The bottom line is the scoreline for SingTel, StarHub
WITH less than six months to go before the world’s biggest football event kicks off in South Africa, Singaporean fans are still unsure if they will even get to watch the tournament on television at all.
This comes after the stunning revelation on Tuesday by both StarHub and Singapore Telecommunications that they had submitted a joint bid for the World Cup next year, but ultimately failed to reach an agreement with the sport’s world governing body, Fifa.
It was initially thought that the two telcos had put in separate bids, such is the intensity of their rivalry in gaining a stranglehold in the local pay-TV market.
But it seems that the cost of beaming the 64 live games is proving too big a price to pay, as the joint statement said that the costs have ‘escalated substantially’, although no exact figures were disclosed.
But let’s not be quick to suggest that SingTel and StarHub are trying to make huge profits from this venture. The price offered to Fifa ‘would sacrifice all World Cup margins’ for both telcos even as they try to match Fifa’s asking price and still keep the fees affordable for consumers, the statement added.
In 2002, StarHub did not charge its existing customers to watch the matches taking place in South Korea and Japan. Four years later, for the tournament in Germany, it charged $15.75 extra for existing Sports Group subscribers, while non-sports group customers were billed $26.25.
So what’s next for the 2010 World Cup? The options are few. One obvious way forward would be for the two telcos to put in an improved joint bid that would meet Fifa’s asking price.
Doing so, however, would result in another problem: Should the telcos stick with the same subscription fees or thereabouts to keep it affordable to the masses, or absorb the higher costs and end up in the red instead of just breaking even?
At the end of the day, it all boils down to making a sound and responsible business decision. If the asking price is just too high, then perhaps it would make better sense for the telcos to hold up their hands, admit they tried their best to clinch a reasonable deal, and then just pull out of the bidding altogether.
But where does this leave viewers in this football-mad country, who are still coming to grips with the stark reality that they could be missing the World Cup telecast for the first time? Not many can stomach the fact that at least 202 other countries – including Malaysia, Indonesia, Yemen, Lebanon and Iraq – will all get to enjoy the games while they may not.
The unsuccessful joint bid also throws up another interesting question of whether such collaborations can be successful in future, be it for the World Cup or any other pay-TV event.
Is Fifa generally reluctant to accept such bids, given that they could be perceived as anti-competitive and not offer the best, or highest, price? At this stage, no one knows for sure.
As fans in Singapore await the final verdict on the World Cup bid, don’t be surprised if some are already bracing themselves to make trips across the Causeway next June to watch the games in Malaysia. The more tech-savvy could resort to live streaming on the Internet, but where’s the fun in watching England take on Brazil on a tiny computer screen?
But let’s not jump the gun. Let SingTel and StarHub go back to the negotiating table with Fifa first. For everyone else, it’s a matter of keeping their fingers – and perhaps toes – tightly crossed that there will be some good news soon.
TELCOs – CIMB
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.
TELCOs – CIMB
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.