StarHub – Daiwa
A beneficiary of the revised Media Market Conduct Code
What has changed?
• On 12 March 2010, the government announced a revision to the Media Market Conduct Code that requires pay-TV providers to cross-carry each other's content acquired or renewed on an exclusive basis on or after 12 March 2010.
Impact
• We believe the new regulation could improve the current competitive environment for pay-TV content, as evidenced by the aggressive bidding for the rights to broadcast the BPL by Singapore Telecom (SingTel) (ST SP, S$3.14, 3, TP: S$3.09) in 2009. Pay-TV operators look unlikely to bid aggressively for exclusive content in the future as they can still have the access to this and, at the same time, increase their subsidies to gain market share. We think this means the rising cost of content can be curbed in the long run, but that the competition may shift from exclusive content to customer subsidies.
• The new regulation will not be applied retroactively, and therefore, it should have little impact on StarHub, given StarHub's existing exclusive content is under multi-year contracts (StarHub did not disclose the details of its existing agreements with content partners due to confidentiality).
Valuation
• We have raised our six-month target price to S$2.27 (from S$1.92), equivalent to a PER of 13x on our FY10 EPS forecasts, on a par with the sector average as we believe the new regulation would probably remove the share-price overhang from the content competition driven by SingTel.
Catalysts and action
• Considering what we consider to be its attractive dividend yield of 9.1% for FY10-12, one of the highest in the region, its valuation (a 12.6x PER on our FY10 EPS forecast) looks undemanding to us. Nevertheless, SingTel's aggressive stance in the pay-TV market, which may shift the scope of competition from exclusive content to customer subsidies, could impair the defensiveness of StarHub. We maintain our 3 (Hold) rating, as we see limited upside potential to our target price.
TELCOs – OCBC
Revamp of Pay TV Segment
Significant revamp for Pay TV industry. The Singapore government has significantly revamped the Pay TV industry by requiring Pay TV providers to cross-carry each other's content that is acquired or renewed on an exclusive basis. In short, Pay TV customers will be able to watch all Pay TV content with their preferred operator and need not pay any extra fee for doing so. Instead, the content supplier needs to pay competitors a fee for carrying its content; in return, the competitor must not modify the content in any way, including ads and branding. However, this only applies to any contract signed or renewed from 12 Mar 2010: this means that previously signed content like the much-watched English Premier League (EPL) will continue to be carried exclusively by SingTel's mio TV.
Good for Pay TV customers. Overall, we view the latest move as positive for Pay TV customers; it may also translate into lower subscription fees due to less aggressive bidding by the service providers, although we are unlikely to see a drastic reduction as having more content to offer still means higher revenue. Furthermore, the ruling may be a boon to new entrants to the Pay TV market as they can offer their content via existing operators' infrastructure without having to fork out their own hefty capital investments. As advocated before, we believe that MobileOne (M1) will be one such key beneficiary; it will also be able to strengthen its triple-play offering.
Impact slightly mixed for incumbents. But the impact is slightly more mixed for the incumbents, especially SingTel where it had been able to use its strong balance sheet to pay more for exclusive content; with the EPL rights expiring by mid-2012, SingTel may have until then to aggressively expand its fledging mio TV subscriber base from the current 155k users (as of end 2009). For StarHub, the latest move is slightly more positive, as its cable TV system is likely to remain the preferred mode of transmission, given that it has already penetrated some 539k homes (as of end 2009). Less aggressive content bidding is also expected to reduce its content cost, currently at around 70% of revenue.
Maintain OVERWEIGHT. It is still too early to discern the financial impact as we think that there may still be a lot of logistics that need to be worked out – the devil is in the details. We still like the telcos for their defensive earnings and attractive yields. Maintain our OVERWEIGHT rating.
TELCOs – DBS
Second IPTV success story in Asia?
• MDA will require SingTel and StarHub to share the content, excluding EPL for 2010-12 season.
• In the near term, except football world cup rights, not many channels are up for renewal.
• In the long term,(i) incumbent StarHub would lose its content-advantage offset to some extent by lower content cost,(ii) challenger SingTel would benefit in both content line up and cost,(iii) better case for M1 to enter IPTV business, riding on National Broadband Network (NBN) and shared content.
Content-sharing regulations finally. Media Development Authority (MDA) finally announced mandatory content-sharing for agreements signed after 12 March 2010. MDA would go through industry consultation for content-sharing mechanism and pricing. The timing could pertain to upcoming football world cup rights so that SingTel-StarHub do not engage in overbidding again. Many popular channels may not be up for renewal in the next 2-3 years, so we do not see any major impact in the near term. SingTel would continue to be the exclusive carrier for English Premier League for 2010-12 season as content sharing applies to agreements done after 12 March 2010.
Impact over the long-term. Positive for SingTel. Besides EPL, SingTel does not have much attractive content, as StarHub holds majority of the popular channels exclusively. As and when SingTel secures these channels, it should diminish StarHub's content advantage. In fact, SingTel has a good chance to convert its EPL only subscribers to full subscribers by offering them StarHub's pay TV channels. SingTel's existing mobile and broadband subscribers should be easy targets. Upcoming launch of NBN in 2010 would also help SingTel to improve bandwidth hungry video-on-demand (VOD) and interactive programs. Besides, M1 could also enter IPTV market in order to offer a complete triple-play product. We reckon that Singapore could be the second IPTV success story in Asia after Hong Kong.
Cautious on StarHub. We see StarHub as a victim in (i) the pay TV business due to its loss of its virtual content-monopoly – beginning with EPL loss (ii) the broadband business due to NBN and its network leasing agreement with SingTel till 2015. With fixed network leasing cost, an expected decline in broadband ARPU due to NBN would directly impact bottomline. We prefer M1 to StarHub as (i) M1 offers 16% yield (regular 7%) for FY10F compared to StarHub's 9% yield (ii) M1, being a pure cellular player would benefit more from higher tourist arrival in Singapore. We also like SingTel for its attractive 12x FY11F PER compared to its historical average around 13x.
SPH – CIMB
Positives to look forward to
• Maintain Outperform. We lift our sum-of-the-parts target price to S$4.50 from S$4.44 after accounting for higher media earnings and contributions from Clementi Mall. We raise our FY10-12 earnings estimates by 2% to incorporate higher print ad and property revenue estimates, offset by higher interest expense. We believe investors' disappointment with its Clementi Mall acquisition has been priced in. Instead, we urge investors to focus on yoy and mom improvements in ad demand (print ads account for more than 50% of SPH's revenue). We see stock catalysts from better-than-expected ad demand.
• Higher page count led by property and job ads. The Saturday edition of The Straits Times averaged 227 pages in February, down from 252 pages in January, as advertising typically slows down during Chinese New Year. However YTD, the page count is up 22% yoy. We believe the uptrend is sustainable, driven by a robust property market and an improving job market. Concerns over high newsprint costs have also eased as prices have been locked in till Sep 10 and remain way below peak prices.
• Defensive, with high dividend yields. For investors looking for defensive names, we recommend SPH for its: 1) near-monopoly of the print ad industry in Singapore, making it a beneficiary of a domestic economic recovery; 2) print business which is well-positioned to benefit from an influx of events over the next few years following the opening of two new integrated resorts; and 3) dividend yields of 6-7%, comparable to the average S-REIT yield and higher than yields from the other large caps.
SATS – OCBC
Ready to soar new heights
Stronger recovery in aviation demand… The International Air Transport Association (IATA) has halved its 2010 loss forecast for airlines to US$2.8b last week (from Dec 2009 forecast of US$5.6b), as improvements driven by economic recovery in Asia-Pacific and Latin America proved to be stronger than expected. According to the association, passenger and cargo demand, which fell by 2.9% and 11.1% respectively in 2009, are now expected to grow by 5.6% and 12.0% in 2010, significantly better than its previous forecasts of 4.5% and 7.0%. We expect SATS Limited to directly benefit from this stronger recovery in aviation demand due to its strong presence in the Asia-Pacific region.
…and growth in visitor arrivals likely to boost SATS' airport services. We also note Singapore Tourism Board (STB)'s recent optimistic projection for 2010 visitor arrivals, which is expected to hit between 11.5-12.5m, up by as much as 30% from 2009 number of 9.7m. We believe it further supports our view that SATS is likely to enjoy stronger demand for its airport services this year.
Food solutions segment expected to fare better as well. For its non-aviation business segment, we believe SATS would also register improved performance in the upcoming quarters, underpinned by strength at Singapore Food Industries (SFI), Country Foods and potential business opportunities in the tourism and hospitality sectors. In the upcoming 4QFY10, margins from SFI are also expected to maintain at current levels as it benefits from lower cost by consolidating commodities at larger quantities, and as Daniels Group enters into a seasonally stronger quarter.
Timely establishment of medium term notes. With the timely establishment of a new S$500m multi-currency MTN programme on 9 Mar, SATS is also well-positioned for all growth opportunities in our view. This as the net proceeds arising from the issue of Notes will be used for general working capital, capex, refinancing purposes as well as long-term strategic investments/acquisitions.
Maintain BUY with S$3.27 fair value. SATS is currently trading at 16.2x FY10F EPS and 14.2x FY11F EPS. We expect the stock to re-rate towards our DCF-based fair value of S$3.27 (or near its high cycle PER of 21x) amid a significantly stronger earnings profile (with acquisition of SFI) and brighter outlook. We believe SATS has still ample room for growth and yield improvements, both internally via synergies with SFI and externally through greater sales volume. Maintain BUY.