StarHub's pay TV performance could weaken by 7% in three years

No thanks to increasing piracy.

The worst is yet to come for StarHub as a new competitor and increased content piracy could put its wireless and pay TV business under siege.

According to Maybank Kim Eng, its bundled services continues to retain subscribers, but revenue leakage remains a risk.

At this point, StarHub's committed distribution per share (DPS) of 16 cents can only be supported through additional debt.

The incoming entry of TPG into wireless could also put pressure on telco companies' margins from handset subsidies.

Pay TV is "seeing erosion" due to competition and increasing content piracy caused by pervasiveness and quality of fixed broadband in Singapore. Wireless service revenue could decline at a three-year compound annual growth rate (CAGR) of 2% and 7% for pay TV.

Here’s more from Maybank Kim Eng:

StarHub’s bundled service (“Hubbing”) strategy has served it well in taking significant share in the wireless (#2), pay TV (#1) and retail fixed broadband (#2) markets in Singapore.

All three business lines are facing adversity due to competition with the hardest hit to margins, we assume, will come from wireless due to higher handset subsidies albeit with lower revenue erosion relative to pay TV.

At this stage we believe operationally things can only get worse and that consensus forecasts have not fully accounted for these prospects.

Wireless and fixed broadband are hurt by increased local competition in high penetration segments, while pay TV is being impacted by changes in viewing habits and overseas pirated content.

We estimate that EBITDA margins will drop to 22% in FY18E from 29% in FY16 from the combination of revenue pressure and rising subsidy costs.