An analyst report from Citi Research on SingTel...
SingTel to gain from World Cup strategy, says Citi
THE EXCLUSIVE DEAL won by Singapore Telecommunications (SingTel) for broadcast rights to the 2014 FIFA World Cup tournament, has yet again brought into sharp focus, the contest with rival pay-TV operator, StarHub, for dominance of the Singapore market.
SingTel announced that its subscribers will be able to view the 64 matches at no extra cost, so long as they enter a re-contract agreement of 24 months for any of the telco’s existing pay-TV packages. Rival operator, StarHub, was suitably miffed, arguing that the viewing public would have been better served if the two operators had secured the rights on a joint basis.
Therefore, rather than paying $112.35 (plus GST) to SingTel, existing subscribers can lock themselves to the telco for two more years in exchange for viewership of the matches. Is this a smart move for SingTel in its race to overtake StarHub as the dominant pay-TV provider? Arthur Pineda, a telco analyst at Citi Research, thinks so.
He thinks SingTel stands to gain from the re-contracting strategy, even if StarHub wants to cross-carry the matches on its platform. “Given that the contracts are generally over a two-year period, this would also result in stickiness among mioTV subscriptions,” he says. “We have noticed that mioTV has continued to gain market share in Singapore's pay TV market. For 2013, mioTV gained 20,000 subscribers versus StarHub's loss of 3,000 subscribers.”
Furthermore, there has been no sign of any material migration of subscribers despite the introduction of media cross-carriage laws in Singapore since 2011. Pineda pointed to the fact that StarHub's subscriber base grew by only about 2,000 in 4Q2013 on a q-o-q basis compared to SingTel growth rate of 4,000 over the same period.
“We remain concerned on the outlook for StarHub's pay-TV business which makes up 17% of total service revenue in FY2013, given the intense competition posed by SingTel’s mioTV,” says Pineda. And there is an additional source of concern for both pay-TV operators as well. Over-the-top (OTT) content providers such as Apple TV, Netflix and Hulu (the latter two available through Virtual Private Networks subscriptions) have been making inroads into the market here, although their exact progress is difficult to gauge as subscriptions in this part of the world are not legally sanctioned.
NOT BULLISH ON EITHER TELCO
As a result, Pineda isn’t bullish on either Singapore telco. He rates SingTel only as “neutral” while StarHub is a “sell” with a target price of $3.55 versus a closing price of $4.03 on March 21. “Moreover, the evolution of pay-TV aggregators also weighs on StarHub's TV operations over the longer term,” he says. The current valuation of its shares is therefore rich, in his opinion. At a lower target price of $3.55, StarHub would already trade on a PE ratio of 15.6 times of its FY2014 earnings and a EV/EBITDA ratio of 9.3. Even at those valuations, the stock will “not be cheap”, although supported by a “firm and sustainable” dividend of 20 cents per share which allows for a “healthy yield”.
Where SingTel is concerned, Pineda says that its recent results for 3QFY14 were “well within expectations” but he did not see a positive catalyst to drive its stock price further. “Upside risk to SingTel's 5% yield is unlikely given the lack of assets and the potential capital requirement for its Digital Life business,” he adds. Despite his estimated fair value of $3.86 for the telco, Pineda’s target price incorporates a discount factor of 10% that is usually applied to stocks like SingTel which also operate as a holding company for listed affiliates. That lowers his long-term estimate of SingTel’s price to $3.66, only slightly above its close of $3.53 on March 21, to explain his “neutral” rating.
But downside risks to SingTel may include the risks of any overpayment in its M&A deals; continuing depreciation in the operating currencies of its listed affiliates against the Singapore dollar; and the “overhang threat” from the divestment of Temasek Holdings’ majority stake in the company due to Singapore’s bilateral Free Trade Agreement with the US. As far as the last risk is concerned, Pineda says he is “comforted by our view of Temasek not being a value-destroyer by looking to sell indiscriminately, but instead looking to structure a gradual stake reduction over the longer term”.
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