SELL | Target price: SGD3.06

SingTel scores early BPL goal. SingTel has stolen a march on StarHub in an early offer for BPL, and obtained non-exclusive rights for the next three seasons. We think it is a lose-lose situation for StarHub. If it decides to pay for its own rights, it will probably have to pay a high price and be prepared for margin contraction, or risk losing subscribers and revenue to SingTel. However, if it does not enter the fray, there may actually be room for dividends to improve as the cash strain would be lessened. Although the situation is fluid, we would recommend SELL as we have assumed that StarHub cannot be without BPL. However, we would review our call if it decides not to bid.

Lose-lose for StarHub. SingTel has jumped the gun on StarHub in an early offer for BPL, and obtained non-exclusive rights for the next three seasons. As the deal is non-exclusive, the cross-carriage law does not apply and it does not have to share. StarHub now has to scramble to negotiate its own rights. It will either have to cough up and suffer lower margins down the road, or back off if the price is too steep for it to stomach, in which case it will risk losing subscribers to SingTel.

StarHub cannot afford to go without BPL again. In our view, StarHub cannot afford to be without BPL for another three years, so we think they will pay. Although it decided not to for the 2010-2013 seasons, that was when mioTV was still a fledgling product and struggling with infrastructure problems. However, mioTV is now a different product as it has acquired compelling content, largely resolved its technical difficulties and SingTel is set on making it even better.

Could cost StarHub a pretty penny. While the price SingTel offered for the 2013-2015 seasons is not known, SGD300m is the oft-mentioned price that it bidded in 2009. In our view, the only way SingTel could have convinced FAPL (Football Association Premier League) to accept its non-exclusive offer without holding a tender is to match its old price. Anything on top would be gravy for FAPL, but SingTel is likely to have stipulated in its negotiations that FAPL cannot accept a lower price from StarHub.

mioTV now has pretty good content! In 3Q12, SingTel beefed up mioTV content to 120 channels vs StarHub’s 200. It has added 40 Fox International channels, including National Geographic, Star World and Fox Movies. It also has almost all of the notable soccer tournaments, such as BPL, English FA Cup, Italian Serie A and French Ligue 1. This is a very big deal in soccer-crazy Singapore. StarHub only has Bundesliga and J-League.

SingTel will keep on improving its offering. Having sewn up BPL, almost all the good soccer matches and added some widely-watched content, mioTV is now in a good position to take on StarHub. However, we understand that they are eyeing more non-exclusive content from StarHub. Anecdotally, the technical glitches that used to plagued mioTV have also been largely resolved. We understand from SingTel that it has put in significant additional capacity to prevent a repeat of past technical issues.

Demands on cashflow in 2013 will be larger than 2012. First, StarHub may need to pay up to SGD150m for 4G spectrum cost, although IDA has not yet set the reserve price. Second, it may need to spend an additional SGD100m a year over the next three years for BPL, not counting other content acquisitions to ward off the challenge from mioTV. Third, there could also be additional capex to upgrade its 3G and 4G infrastructure to meet IDA’s more stringent network quality requirements, which we have not yet factored into our forecasts.

Raised funds to meet possible cashflow shortfall next year. Using the assumptions above, we estimate StarHub’s 2013 free cashflow at just 14 cents per share, not enough to pay its annual dividend of 20 cents per share. This is probably why StarHub issued SGD220m in medium-term corporate paper in Sep 2012 (10-year 3.08% fixed rate bond expiring in 2022).

But room for capital management if no BPL. However, if StarHub does decides NOT to bid for BPL, there could be room for capital management actions such as a special dividend or, more likely, an increase in the ordinary dividend by further gearing up its balance sheet. Currently, its net debt/EBITDA is the lowest among all the Singapore telcos at just 0.56x. While we expect this to rise to 0.8x in FY13 due to heavier capex and investments next year, StarHub could still afford to gradually gear up to 1.0x over the next three years, which would give it dividend headroom of 2-3 cents a share a year.

Source: Maybank Kim Eng Research - 12 Oct 2012