StarHub confident of extending EPL rights

The likelihood of any irrational bidding for the English Premier League (EPL) rights may be limited due to a risk of regulatory intervention to keep prices in check, we believe. Also for StarHub, the standalone economics may not be appealing, and investment is largely justified on the opportunity cost analysis. SingTel will also need to consider its ADSL coverage/quality issues. A joint bid may not be acceptable to the FA Premier League as it reduces pricing tension for future auctions. Our base case is StarHub winning again, otherwise a wholesale deal (for access to their HFC and/or even content) cannot be ruled out, in our view.

There has been no significant change in the operating environment — competition is benign and the macro impact moderating. We expect revenue growth to remain benign this year at 1-2%, with margins largely stable. On NBN, the company does not expect significant pricing pressure in the consumer segment and sees upside from nonresidential and government segments. In the local fixed network market, the incumbent SingTel has ~75% share and StarHub ~25%.

StarHub is one of the few global carriers with a Femtocell product. It offers it for up to four 3G phones for S$32.10/month and includes unlimited local calls and SMS. Although these are still early days, Femtocell could be a niche segment and good for the carriers as it overcomes coverage issues/reduces capacity on the macro network. However, the customer needs to be offered strong incentives to take up this service, and revenue upside may be limited. Issues around interference, handover and bandwidth efficiencies are being addressed.

Our DCF-based 12-month price target of S$2.35 assumes a WACC of 8% with a terminal growth rate of 1.5%.

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StarHub: Price reflects challenges ahead

StarHub has achieved over 50% of our FY09F forecast. As expected, 2Q09 profit was significanlty better than 2Q08 profit, which was hit by competition due to mobile number portability. Overall, we see no risk to FY09F earnings and 18 Scents DPS estimate for FY09F. Management expressed confidence in securing the English Premier League (EPL) rights, providing there is rational competition from SingTel, in line with our view. The outcome of the bid is in 2-3 months time. Management conceded that EPL right could come at a higher price than the last time, but believed that pay TV margins could be kept stable.

Mobile business showing signs of recovery ahead of other segments. (i) Mobile ARPU showed sequential recovery with higher roaming and data contribution. (ii) Broadband ARPU showed sequential decline due to higher discounts and lower speed plans, in line with our view. (iii) Pay TV ARPU showed sequential decline due to lower take up of premium channels, which could be temporary. (iv) Fixed line business was stable sequentially.

Target price revised to s$2.40 in line with higher valuation for peers. Our SOTP target price of S$3.50 for SingTel, with earnings FY10F-FY12F CAGR of 8%, translates into 14.5x FY10F (Mar year end) PER. Given that StarHub is ex-growth due to challenges ahead in the broadband and pay TV segments, we assign StarHub a PER of 13x at 10% discount to SingTel¨s and regional peers average of 14.5x PER.

StarHub Ltd: Stable 2Q09 Results

2Q09 results within expectations. StarHub Ltd reported its 2Q09 results last night; revenue rose 0.2% YoY and 0.3% QoQ to S$532.4m, or about 0.8% ahead of our forecast, net profit jumped 21.1% YoY (but fell 5.7% QoQ) to S$77.9m, or just 0.8% shy of our estimate. StarHub declared a dividend of S$0.045/share as promised. For 1H09, revenue fell 0.3% YoY to S$1063.0m, meeting 49.5% of our full-year estimate, while net profit climbed 11.0% to S$160.3m, fulfilling 50.8% of our FY09 number.

Mobile business remains resilient. By segments, mobile revenue grew 1.0% YoY and 2.7% QoQ to S$271.9m, driven by both pre-paid segment on the YoY basis and post-paid business on the QoQ basis. While PayTV business saw 1.6% YoY and 1.5% QoQ declines to S$100.5m, mainly hit by a 3.4% QoQ slide in monthly ARPU to S$56/subscriber; we note that there was a marginal 0.4% QoQ user growth. Broadband business was its worst performer, down 3.2% YoY and 3.4% QoQ to S$60.3m, after suffering a 7.3% QoQ slide in monthly ARPU to S$51 due to plan downgrades; monthly churn also rose from 1.1% (over the last four quarters) to 1.4%. Lastly, fixed network services grew 7.3% YoY and 1.1% QoQ to S$80.0m, where data & internet services contributed 85% of the amount.

Maintains stable outlook for 2H09. Although management has yet to see clear signs of a sustainable recovery in consumer and enterprise spending, which is further exacerbated by the current flu pandemic, it has maintained its stable guidance for the rest of 2009. It expects service revenue to maintain at 2008 level; EBITDA margin on service revenue to remain around 32%; cash capex not to exceed 11% of revenue; and its S$0.045/ quarter cash dividend, or S$0.18 total for FY09.

Maintain BUY with S$2.88 fair value. The biggest concern in 2H09 will be the upcoming auction of the 2010/2012 Barclays Premier League broadcasting rights, which we believe should still be won by StarHub albeit at a higher cost - it should be able to pass on the bulk of the cost to its sports subscribers (with potential 20% price hike) and remain profitable. Beyond 2009, we see the possibility of StarHub entering into the enterprise broadband market in a bigger way with the NBN (national broadband network) vs. its limited penetration currently. We continue to like StarHub for its defensive earnings potential and attractive dividend yield of 8.0%. Maintain BUY with S$2.88 fair value.

Starhub - Best upside among telcos

BUY on sound fundamentals, high yield. National Broadband Network (NBN) and English Premier League (EPL) are two key issues pressurising StarHub’s share price, but we believe the impact may not be as bad as expected. Its core operations continue to generate good cash flows, and yields are estimated to top the industry at 8.7%. Maintain BUY, with DCF-backed price target of S$2.39.

NBN benefits StarHub’s corporate drive. NBN opens up new opportunities in the corporate segment. Currently, StarHub’s fibre optic network covers 25% of non-residential buildings, with the remaining 75% being a virtual monopoly for SingTel. Post-NBN, StarHub will be able to raise its market share at the expense of SingTel. Another area which the latter dominates is the government sector, and this is likely to provide some growth for StarHub in the next few years.

Retail segment may not be as hard hit. Consumers may be salivating at theprospect of having high speed internet at a fraction of today’s prices with the launch of NBN, but think again. CEO Terry Clontz believes that the pricing may be as much as S$75 per residential line, only less than 10% lower than today’s prices. The high cost and low margins may deter competitors from entering the fray. He concedes that M1 will try to gain market share resulting in some near term downward pressure on margins, but beyond that, it will still be a “shoot-out” between StarHub and SingTel.

EPL up for grabs in 3Q09. StarHub will likely fight hard to retain the broadcast rights for EPL, and we estimate that StarHub’s winning bid will be 50% more than the reported US$160m it paid previously. However, Media Development Authority of Singapore (MDA) is now studying the possibility of non-exclusivity of such coveted contents, which we believe is positive for StarHub as it lowers content costs substantially and allows it to retain its customers.

Neil Montefiore to succeed Terry Clontz as CEO of Starhub

Starhub (STH) has announced that Mr Terry Clontz will retire as CEO in Jan 2010 and will be succeeded by Mr Neil Montefiore, who left M1 as CEO in Feb 09.

STH has benefitted significantly from Mr Clontz's leadership but his retirement is not a particular surprise. After being with STH for more than ten years, his departure was not a matter of "if", but "when". In fact, we had often thought that Mr Clontz might have left earlier but believe the Jul 08 departure of Mike Reynolds (the previous President) complicated the succession plan. After his departure, however, STH will have a new CEO and (a relatively new) COO.

But while Mr Clontz's retirement is not particularly surprising, the appointment of Mr Neil Montefiore is interesting in several respects. Mr Montefiore comes with substantial experience of the Singapore telco market having been CEO of M1 for more than 12 years (which he left rather abruptly earlier this year) and is considered to be one of the leading strategic thinkers in Asian telcos (at least in our opinion). He had for example plans to develop M1 into a fully integrated operator across fixed and mobile but was unable to achieve his vision there. As such, his appointment as STH's CEO now offers him the platform to develop this objective / vision and we look forward to watching STH's development under his leadership.

We expect Mr Clontz to oversee STH's bid for the English Premier League rights which is the key 2H09 event. Despite the management change and the EPL auction, given upside to our valuation and the sustainable and attractive yield, we maintain Buy.

StarHub: Improved market share & margins

Corporate data business was star performer. Net profit of S$82m (+3% y-o-y, -6% q-o-q) was ahead of our S$80m forecast, due to strong results at its corporate data business. We believe StarHub’s new COO, Mr Tan Tong Hai (credited with turning around Singapore Computer Systems, which was acquired by SingTel recently) is the key driver of corporate business – the next growth engine for StarHub. There was weakness in mobile and broadband ARPU due to the weak economy, but overall service EBITDA margin of 33% was better than we expected. There were improvements in its mobile and pay TV market shares.

FY10F earnings raised by 6%. Management revised its EBITDA margin guidance from 31% of service revenue to 32%, while service revenue would be flat, in line with our FY09F estimates. We raised FY10F earnings by 6% in view of stronger growth from the corporate data segment as StarHub increases access from 800 buildings currently to 2,600 buildings in the next 2-3 years through the National Broadband Network.

Attractive valuations and assured 9.4% yield. The market is worried about SingTel bidding irrationally high for English Premier League (EPL) content in 3Q09. We believe this is unlikely to happen, as SingTel is a ROI driven company. But to be conservative, we factored in high cost of EPL content in our FY10F and FY11F estimates. Maintain Buy and S$2.20 target price, pegged to 12x PER

Starhub - EPL win largely priced in ; Switch to SingTel

We downgrade StarHub to Neutral as risk-reward appears balanced ahead of the bid for English Premier League (EPL) broadcasting rights in 2H09. We are trimming our PO 5cps, to S$2.05 as we factor structurally higher content cost. We recommend switching to SingTel where stub is 20% less expensive on EV/EBITDA but has superior earnings growth of 3% for CY10.

The market is currently pricing in ~75% chance of StarHub winning the EPL bid, based on our valuation range for EPL outcomes. We value StarHub at S$2.25/shr if it wins the bid and S$1.75/shr if it loses. Our PO of S$2.05/shr assumes 60% probability that StarHub wins. If StarHub loses EPL and drops to a price of around S$1.60 per share (roughly 10% discount to S$1.75/shr, 11% yield), we would revisit our opinion.

We forecast StarHub’s earnings to decline 0-3%, for FY0-11. Mature markets (mobile & penetration rates are >100%) and stronger offerings from SingTel (mobile & pay TV) mean StarHub will find it tougher to grow its top-line. Competition for content from SingTel should translate into structural margin pressure at StarHub and risk of eventually losing some key content, e.g. EPL.

StarHub has a yield of ~8% vs government bond yield of <3%, making it one of the most attractive yield stocks in the region. Mgt is committed to a dividend payout of S$0.18/shr p.a. (payable qtrly). This is backed by mgt’s strong track record of returning capital to shareholders and FCF coverage of 1.2x for 2010E.

NBN benefits StarHub’s corporate drive

NBN benefits StarHub’s corporate drive. NBN opens up new opportunities in the corporate segment. Currently, StarHub’s fibre optic network covers 25% of non-residential buildings, with the remaining 75% being a virtual monopoly for SingTel. Post-NBN, StarHub will be able to raise its market share at the expense of SingTel. Another area which the latter dominates is the government sector, and this is likely to provide some growth for StarHub in the next few years.

… while retail segment may not be as hard hit. Consumers may be salivating at the prospect of having high speed internet at a fraction of today’s prices with the launch of NBN, but thinkagain. CEO Clontz believes that the pricing may be as much as S$75 per residential line, less than 10% lower than today’s prices. The high cost and low margins may deter competitors from entering the fray. He concedes that M1 will try to gain market share resulting in some near termdownward pressure on margins, but beyond that, it will still be a “shoot-out” between StarHub and SingTel.

EPL up for grabs in 3Q09. StarHub will likely fight hard to retain the broadcast rights for EPL. We estimate that StarHub’s winning bid will be 50% more than the US$160m that it paid previously, and this would likely lower EBITDA margins by 1.5%. However, Media Development Authority (MDA) is now studying the possibility of non-exclusivity of such coveted contents, which we believe is positive for StarHub as it lowers content costs substantially and allows it to retain its customers.

Growth drivers. Mobile broadband growth will likely peak this year, with handheld smartphones usurping the throne. It will be applications driven, leading to higher ARPUs. In management’s view, Pay TV also has some room to grow, from the current penetration rate of 46% to 55-60% in the steady state.

StarHub: Margin expansion raises the bar

Earnings up 3%, above expectations. In the three months to 31 Mar 09, earnings inched up 3% YoY to S$82.5m on the back of a 0.8% YoY contraction in revenue to S$530.6m. EBITDA margin, at 33%, is flat from a year ago but improved 0.9ppt QoQ. Rising margins for mobile (+0.8ppt YoY) and fixed network (+1.6ppt YoY) led to better than expected results. Strong cash flows. Free cash flow surged almost 4x to S$115.3m (6.7S¢/share) due to improvement in working capital. As a result, Net Debt-to-EBITDA improved to 1.05x, from 1.25x a year ago. Its target is 1.5-2x, which suggests room for capital management. But given the tight credit conditions, this is unlikely to happen. Capex, at 10% of revenue, remains comfortably in check.

OpCo win shaves fears. StarHub, which derives the largest portion of its revenue from broadband among the three telcos, is deemed to be the biggest loser when it comes to the National Broadband Network (NBN). But its OpCo win would have partially alleviated such fears. Moreover, NBN will likely lend a boost to its commercial business, which currently accounts for 20% of revenue.

Confident of snagging EPL rights. Investors have also been worried whether StarHub can retain the English Premier League rights for the 2010-12 seasons. When probed, CEO Terry Clontz appeared confident of winning the rights, claiming that a bidding strategy is already in place. We have assumed that StarHub would win the race by paying 50% more than what it paid three years back. He further believes that incremental costs will be covered, and thinks that analysts who have assumed lower margins may be too conservative.

Earnings estimates, target price raised. We have raised our earnings estimates by 4.2% to S$310.9m in FY09 on the back of improving margins. Dividend yield, at 9.2%, remains the highest among the telcos and the best among the STI components. We derive a target price of S$2.39 based on DCF (previously S$2.35), which implies an upside of 22.5%. StarHub remains our top pick and only BUY in the telco sector.

StarHub : Commendable 1Q09 Results

1Q09 results within expectations. StarHub reported its 1Q09 results last night, with revenue down 0.8% YoY at S$530.6m, almost smack on our S$530.0m forecast, while net profit rose 3.1% to S$82.6m, or shy of our S$82.9m estimate; this included a tax credit of S$0.8m due to the corporate tax rate cut from 18% to 17%. On a sequential basis, revenue fell 1.1%, reflecting the economic slowdown, while net profit declined by 5.6%. But we note that the sharper earnings QoQ decline was due to a lower effective tax rate in 4Q08; otherwise, pre-tax profit rose 2.5% to S$101.5m, thanks to lower cost of sales and operating expenses. It also declared a dividend of S$0.045/share.

Drop in mobile revenue. On its key business segment, mobile revenue came off 3.1% YoY and 2.8% QoQ to S$264.7m, mainly due to lower revenue from its post-paid segment, which fell 4.8% YoY and 3.5% QoQ. Although it managed to grow its post-paid subscriber base by 9k users, we note that ARPU (average revenue per user) eased from S$71 in 4Q08 to S$67, hit by lower voice usage, IDD and outbound roaming services, while monthly usage also dropped from 469 to 442 minutes. A higher mix of customers on the discounted MaxMobile Data plans also had a diluting effect on post-paid ARPU. On the other hand, pre-paid revenue rose 2.7% YoY (down 0.5% QoQ), as the base grew by 40k to 914k users, though ARPU slipped from S$25 in 4Q08 to S$24. Mobile EBITDA margin improved from 36.6% in 1Q08 to 37.4%, thanks to lower acquisition cost and quantity of equipment sold.

Guides for stable service revenue. StarHub is guiding for stable service revenue (excludes non-core equipment sales), which management considers as "recurring revenue". Earlier, management guided for a low single-digit growth in total revenue. On the other hand, it has bumped up its service EBITDA margin from 31% to 32%. It has also kept its capex guidance to 11% of operating revenue. More importantly, based on its projected profitability and cash flow, StarHub intends to continue to pay S$0.045/ cent dividend every quarter, totalling S$0.18 for the full year. Maintain BUY. Overall, StarHub posted a pretty commendable set of results, despite the economic slowdown. As 1Q09 results were well within expectations, we are leaving our FY09 estimates intact; we may see room for upward revision should the economy recovers faster than expected. Maintain BUY with S$2.88 fair value.

Starhub results were within expectations, Hold maintained

1Q FY2009 results. StarHub reported 1Q FY2009 operating revenue of S$530.6m (-0.8% yoy) and net profit of S$82.5m (+3.0% yoy). It also declared an interim dividend of S$0.045 per ordinary share, which was the same as 1Q FY2008.

Despite the slight decrease in revenue, net profit rose because of the tax credit adjustment due to the reduction in corporate tax to 17%, lower operating costs and lower interest expenses.
Performances of the various business units. StarHub reported mixed performances in its business units: mobile revenue was S$264.7m (-3.1% yoy), Pay TV revenue was S$102.0m (+4.9% yoy), broadband revenue was S$62.4m (-2.6% yoy), fixed network service revenue was S$79.1m (+8.7% yoy) and sale of equipment revenue was S$22.4m (-19.3% yoy).

StarHub continued to be successful in attracting new customers to its services. As at 31 March 2009, the number of customers for its mobile, Pay TV and broadband businesses were 1,815,000, 527,000 and 383,000 respectively. However, mobile revenue fell because customers made fewer domestic and international calls. In addition, broadband revenue decreased as customers opted for subscription discounts. Moreover, consumers were more cautious in their purchases of handsets during the economic slowdown. Meanwhile, Pay TV and fixed network service posted single-digit growth due to the increase in the number of customers.

Profit margin. Net profit margin decreased from 16.3% in 4Q FY2008 to 15.5% in 1Q FY2009. This was because of the the tax relief adjustment of S$10m in 4Q FY2008, which resulted in higher profit.

FY2009 Outlook. StarHub expects the service revenue for 2009 to be maintained at 2008 level. In view of the recession, it will focus on customer retention and preservation of operating cash flow for 2009. Furthermore, it intends to pay a minimum cash dividend per quarter of S$0.045 per ordinary share, bringing the total to S$0.18 for the full year.

Maintain HOLD recommendation and target price at S$2.14. As StarHub’s results were within expectations, we maintained our target price of S$2.14 under the discounted cash flow (DCF) model.

Although StarHub offers its services only in Singapore, it continues to be an attractive stock as it offers dividend yield 9.2%. We kept our Hold recommendation because of limited upside in the share price to our target price of S$2.14.

On StarHub wins fibre Opco tender

Telecom regulator IDA has awarded the second phase of the national broadband network (NBN) project called OpCo to StarHub. Terms governing exclusivity provisions and pricing for various packages offered by OpCo (eg, IPTV service) are as yet unavailable, and this will influence SingTel's likely competitive approach. It is too early to quantity the financial effect, and we expect the stocks to be volatile in the near term.

OpCo details: Wholesale pricing ranges are S$6–106 for residential (our estimate average is S$15) and S$25–810 for corporate subs. The project is expected to cost S$1bn over 25 years. StarHub's initial investment is around S$100m, and the government will contribute S$250m subject to rollout targets (330k residential subs and 80k non-residential subs by 2015). Commercial operations are set to begin in April 2010 with 100% coverage by 2013.

StarHub's strategy: We suspect that StarHub's business case is built around defending the residential market, while seeking opportunities in the corporate market, where it lags SingTel with a very low market share (~10%). Wholesale pricing varies depending on quality of services. Although the entry level package starts at S$6 for the best-effort Internet package (100Mbps), services like TV and video streaming are expected to cost more (S$106 for 1Gbps connection).

What are SingTel's options? SingTel needs to make a “buy” or “build” decision. Given StarHub’s win, we understand that exclusivity provisions may not apply and that SingTel can build an alternative OpCo network. This would entail paying a fee to StarHub (we estimate S$4.5–6.0 per residential sub), with no government subsidy but the benefit of less regulatory oversight.

Effect on StarHub – did it overbid? Headline S$6 residential pricing is aggressive and raises fears about cannibalization of existing residential broadband/pay TV revenues. We understand this is only for the bare bones package. An average user of StarHub's existing broadband plans would have to pay more; this key missing detail will underpin StarHub’s investment case. Effect on SingTel: We see risks in the corporate market segment given SingTel's dominant market share, but a limited effect in the residential market.

We believe aggressive headline wholesale pricing for an entry level package – one of the few details released today – is designed to generate excitement among the general population about the government's key policy initiative; it is not representative of wholesale prices for the average user. Current developments are neutral/mildly positive for M1.

Investors will have to trust that StarHub’s management has done the sums correctly, with a pricing strategy that does not invoke a strong defensive reaction from SingTel. We expect both StarHub and SingTel to be volatile in the near term as we await more details. That said, based on StarHub’s track record and management commitment to shareholder value, we would view any significant weakness as an opportunity to accumulate.

Starhub - Stable free cash flow; potential near-term catalyst if wins OpCo bid

StarHub’s recent 4Q results were better than expected and management guided for “low single digit” revenue growth for 2009 despite the sharp slowdown in Singapore’s economy. We have raised our 09/10/11 earnings forecasts by 4%/4%/2% on the back of higher revenue expectations and increase our 12-m SOTP based TP to S$2.51 (from S$2.45). Although we think that there is risk to StarHub’s revenue growth guidance given macro uncertainties, we are more confident that it will be able to maintain its free cash flow (FCF) to support its S$0.18 (9% curr yield) minimum dividend guidance, due to its low capex and stable margins.

A potential upside risk to StarHub’s FCF would be if it wins the right to build the “OpCo” portion of the National Broadband Network (NBN). The winner should be announced this month. Although building OpCo would increase StarHub’s capex over the next several years, we nevertheless believe it could be a positive catalyst for the stock, as we think the project will be value accretive. Importantly, StarHub’s management has said that it is confident it could still meet the S$0.18 annual dividend even if it is building the OpCo. In the event that StarHub does not win the bid, we do not believe there is meaningful downside risk to the stock, as the market does not appear to have priced in any potential OpCo upside.

StarHub trades at 2009E FCF/equity and FCF/EV yields of 11.7% and 9.6%, respectively, which we view as attractive relative to its regional peers’ yields of 8.7% and 8.5%. Furthermore, we think that downside risk to the share price is limited, as it should be supported by its high dividend yield of 9%. We derive our TP by capitalizing our estimate of StarHub’s 2009E normalized FCF at 13.4x. We maintain our Buy rating (on Conviction list).