• Lose-lose for StarHub. We believe StarHub’s share price will come under pressure leading up to the battle with SingTel over the rights to the 2010-2012 BPL seasons in 3Q09. If it wins, it would have to pay a steep price with questionable ability to pass on the cost to subscribers. If it loses, it could see significant customer churns.
• Window of opportunity to grab BPL. With most of the other attractive content locked up at least till 2010, SingTel has a small window of opportunity to clinch these rights. We believe that SingTel will go all out to win. It has been acquiring content aggressively, demonstrating its intent of building up its pay TV business.
• Regulatory intervention? Recent press reports have suggested that the regulator could intervene to prevent escalating content cost. But we believe it is beyond the boundaries of the regulator as the decision on exclusivity provision appears to lie with the content owner (FAPL).
• Sensitivity analysis. If StarHub loses its exclusivity of the BPL rights, we expect a 7% uplift to FY10 earnings due to savings on content costs, but FY11 core net profit could drop 5% due to rising churns. We currently assume StarHub will retain the rights, but at double the S$200m it paid in the last auction.
• Sell into the recent strength. At this stage, it is too premature to make any incisions to our earnings forecast or our DCF-based (WACC: 9.4%, LT growth: 1.0%) target price of S$1.58. We believe the market has not adequately priced in the risk of a loss of this exclusive content. Maintain UNDERPERFORM on de-rating catalysts of a) content warfare in 3Q and b) downtrading to its pay TV and broadband franchise.
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