StarHub: Buy (RBS, 6 Nov)
StarHub has been de-rated after it lost the broadcast rights for the English Premiere League (EPL) and ESPN content from mid-FY10. We believe this de-rating has been overdone. Based on our sensitivity analysis, the loss of EPL/ESPN content should reduce earnings by 5-6%. There is the risk that subscriber migration to SingTel's IPTV service might lower StarHub's pay TV and possibly its broadband revenue contributions, but we believe this will be softened by the removal of significant costs attached to EPL/ESPN, which we estimate are north of 20% of the group's annual pay-TV revenue. We believe it is possible that SingTel's acquisition of EPL/ESPN leads to pay TV market expansion on dual subscriptions. SingTel's non-sports offers remain inferior to those of StarHub, which has locked in its content through long-term contracts. We may see some migration of StarHub customers who signed up purely for sports, but we believe that majority of sports subscribers will remain with StarHub and opt for a second pay TV subscription with IPTV. This might lead to a lower blended average revenue per user (ARPU) for StarHub, but this should be offset by reduced content cost and lower churn. If the dual-subscription scenario proves to be true, we could see upside to our earnings estimates on more limited revenue slippage. We upgrade StarHub from Hold to Buy, as the share-price correction has uncovered value, in our view. The stock is trading at a 23-25% discount to its historical PE and EV/EBITDA averages. Dividend yields remains attractive at 9%. Our forecasts and our DCF-based target price of S$2.15 are unchanged. With consensus FY11F EPS trending down by just 5% since the loss of EPL/ESPN, we believe the three-month price correction of 16% is overdone.