iPhone effect already factored in. M1 will report its 3Q12 results on 15 Oct. We expect service revenue to be SGD190-191m (flat QoQ) and net profit to fall QoQ to SGD33-34m, with EBITDA margin expected to fall further QoQ. However, margins should rebound in 4Q12 and beyond as the effects of the iPhone 5 wane. With dividends likely to be maintained at 2011 level of SGD0.45 a share, the stock’s yield of 5.5% should limit downside. However, positive catalysts are limited and likely to stay so until late 2013 at least. Maintain HOLD.

Handset subsidies to spike in short term. iPhone 5 was launched on 21 Sep. M1’s accounting allows it to offset part of the handset cost against future revenue. However, it is not a full offset and we do expect margins to be affected. Also, the high-end Galaxy S3 should also have exerted a negative impact on margins, as it was launched only in May 2012 (just 1 month of sales in 2Q12) and unlike iPhone, M1 expenses off subsidies for Android phones immediately.

Expect to see lower margins in 3Q12. Despite falling two percentage points to an unprecedented low of 38% in 2Q12 (mainly due to higher subscriber acquisition and retention costs), we estimate EBITDA margin could have fallen another two percentage points or more QoQ to approximately 36% in 3Q12.

But margins should improve thereafter. Margins may stay depressed in 4Q12 from spillover iPhone effects. However, we should see an improvement in the following quarters as the impact of the more expensive handsets evens out. Generally, Android phones excluding the hugely popular high-end models such as the Galaxy S3, carry lower subsidy costs than the iPhone. In the longer term therefore, the greater popularity of Android handsets should boost margins and earnings due to their lower costs relative to the iPhone.

Earnings depressed but dividends to be maintained. We had downgraded full year earnings following 2Q12 results. However, management has committed to maintaining dividends at 2011 level of SGD0.145 a share, hence M1’s tradionally healthy yields (currently 5.5%) will also remain intact. This should support the stock on the downside despite a lack of fundamental catalysts in the short term.

Longer term catalysts yet to surface. Fibre broadband services and LTE mobile services are longer-term catalysts for M1, particularly as recently-lowered data caps on mobile device plans should ease the monetisation of data in future. However, we do not expect upside from these catalysts to be realised until late 2013 at least, as its new business streams are still at early stages and margin upside is being hampered by heavy initial fixed investment costs.

Source: Maybank Kim Eng Research - 11 Oct 2012