Starhub - RHB Invest 2016-03-23: Beefing Up Local Content

Starhub - RHB Invest 2016-03-23: Beefing Up Local Content STARHUB LTD CC3.SI 

StarHub - Beefing Up Local Content 

  • StarHub’s acquisition of a local content producer and the MOU with CM are longer-term positives but with little impact on mid-term earnings. 
  • Maintain NEUTRAL as we expect 
    1. FY16 earnings to contract with the exhaustion of the fibre grant 
    2. Competitive headwinds from a fourth mobile network operator 
  • Our DCF TP is cut to SGD3.75 (from SGD4.06. 13% upside) after building in higher capex for the next three FYs as we expect the group to capitalise on the stronger growth prospects accorded by the enterprise market. 

Buys content provider. 

  • StarHub announced the acquisition of a 9.05% stake in Catalist-listed mm2 Asia (MM2), a Singapore-based content producer for TV and online platforms ( for SGD18.04m. 
  • MM2 has collaborated with StarHub on local content production since 2012 and has produced/distributed over 50 films across Asia. 
  • The investment should strengthen StarHub’s local content production capability/delivery and further differentiate its pay-TV franchise via the creation of original content to compete with the likes of over-the-top (OTT) streaming services. 
  • We believe this is consistent with management’s strategy to reduce the reliance on imported content, which has seen significant cost escalations in recent years. 
  • MM2 posted a headline net profit of SGD5.1m (+70%) and revenue of SGD24.3m (+50.9%) in FY15 (Mar). 
  • The purchase values StarHub’s investment at a trailing 11.5x P/E, which we think is fair, considering the various product, platform and distribution synergies that MM2 brings to the table. 

MOU with China Mobile (CM). 

  • The more immediate and discernible benefit of the five pronged collaboration is the reciprocal roaming arrangement – StarHub being the exclusive roaming partner in Singapore for CM and vice versa. 
  • While inbound roaming revenue/traffic from Chinese travellers has and is likely to continue to expand, it is still not a significant portion of the estimated 15% of mobile revenue that StarHub derives from roaming – the bulk is still made up of Malaysian/Singaporean travellers shuttling between both countries. 
  • Other positives include procurements savings from network equipment and handsets/devices, given the CM’s significant scale advantage. 

Maintain NEUTRAL, higher capex assumed. 

  • We expect StarHub to fund the investment in MM2 entirely via cash (SGD173.4m as at 4Q15). 
  • While the impact on earnings is expected to be immaterial, we take the opportunity to factor in higher capex spending of SGD350m over the next three years (SGD310m-320m previously) on increased fibre investments to serve the needs of the enterprise market where management sees good upside potential. 
  • This reduces our FY16-18 core earnings forecasts by 1-3% and our DCF TP to SGD3.75 (WACC: 7.2%, TG: 1.5%) from SGD4.06. 
  • Key risks are stronger-than- expected competition and higher-than-expected capex.

Singapore Research RHB Invest | 2016-03-23
RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 3.75 Down 4.00