Singapore Telecom Sector - Lessons from US & UK


• Netflix has adversely affected Pay-TV players in US, less so in UK. Singapore Pay-TV players are likely to be resilient in the medium term

• However, channel aggregator model of Pay-TV players is at risk in the long term as individual channels go online

Maintain Fully Valued on M1 & StarHub due to the threat from potential 4th mobile player

UK Pay-TV players have been more resilient than US counterparts
Pay-TV players in US have been losing subscribers to Netflix and other over-the-top (OTT) players, resulting in lower profitability (see side chart). On the other hand, Pay-TV players in UK have been able to grow their subscriber bases despite Netflix’s presence. One of the key reasons is that Netflix’s content in US is more diverse and comprehensive than in UK. The US Pay-TV market is over five times larger than the UK's, making content production feasible. In addition, UK’s popular and numerous free-to-air channels make OTT players less attractive. Singapore is a much smaller market with robust free-to-air TV, and regulatory requirements may add further costs to Netflix. As such, Netflix is likely to partner with existing Pay-TV players to enter Singapore.

More channels to take online route in the medium term 
Channels such as HBO and CBS have gone online and are available for a monthly fee to anyone in US with a broadband connection. In our view, customers might subscribe to their favourite channels online directly unless Pay-TV players offer compelling in-house content as part of their Pay-TV package. Aided by government grants, StarHub already produces some local content in Mandarin and other languages catering to certain niches. The company needs to produce more compelling content in the long term, in our view.

Maintain Fully Valued on M1 and StarHub
We forecast flattish earnings for both the companies in FY16F followed by low-single-digit earnings decline from FY17F onwards. Our DCF-based TPs of S$3.30 for StarHub and S$2.60 for M1 imply target dividend yields of 6% (5.5% currently) and 6.6% (6.1% currently) respectively, given weak growth prospects. (Read Report)

Source : DBS Group Research

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