StarHub fails to absorb increase in programming costs

A costlier viewing pleasure. Starhub will increase the subscription price of its basic cable TV service by S$2/mth (excluding GST) with effect from 1 Aug. Management reasoned the rate hike to rising content costs in recent years where it is no longer able to absorb the increase in overall programming costs. We are not entirely surprised by the move given that content cost has risen sharply worldwide making it difficult for pay-tv operators to continue subsiding viewers without further sacrificing margins. The last time StarHub raised its subscription fee for cable TV was back in Jul’07, by S$4/mth (before GST) for its basic group and value packs.

Content cost remains sticky. Starhub’s cost of services, which accounts for the largest component of its operating cost at 21% grew at a CAGR of 13% in FY07-FY10 versus the 5% CAGR in cable TV revenue. Content cost as a proportion of revenue has widened from 11.6% in FY07 to 15.1% in FY10 despite the loss of the Barclays Premier League (BPL) rights to Singtel in 2009 as StarHub added new channels and likely renewed exclusive content at terms that are more prohibitive in opinion.

Stronger cable TV revenue for FY11/12. The rate hike would raise cable TV revenue by 4-13% for FY11/12, all else being equal (cable TV subscribers maintaining their current viewing preference and packages). The price increase effectively bumps- up the monthly subscription by 5-8% depending on content tiers. Based on the last rate hike in 2007, cable TV revenue expanded 5% a quarter following the increase and 10.7% after 6 months on the back of a S$2-4/mth uplift in cable TV ARPUs. While there is always risk of customers downtrading to cheaper packages, we expect the majority of viewers to retain their existing plans given that Starhub still offers the most compelling pay-tv content with about 170 channels offered currently.

Cross carriage ruling should see programming cost moderate over the longer-term. While content cost will likely remain a drag on cost over the medium term, the implementation of the cross carriage ruling (sharing of content) would remove the incentive for pay-tv providers to compete aggressively for popular content, potentially lowering programming cost over the longer-term.

Maintain NEUTRAL, DCF FV upgraded to S$2.90. As cable TV revenue contributes some 16% of StarHub’s total revenue, the rate hike would have the effect of raising our overall FY11/12 revenue forecasts by about 2%, and consequently our core earnings estimates by a smaller 0.8-1% as the price hike only partially offsets higher content cost. Our DCF FV on StarHub is raised slightly to RM2.90 (from S$2.80 previously) based on 9.5% WACC and TG of 1.5%. StarHub remains a NEUTRAL on concerns over NGNBN competitive headwinds with share price support coming from its generous dividend yield of over 7%.