Hold | Target price: SGD2.65

No catalysts despite near-term earnings recovery. M1 disappointed in 3Q12 due to elevated subscriber acquisition costs. Even though we expect 4Q12 to recover on the back of greater 4G tiered plan takeup, we do not see any positive catalysts for FY13. Capex is the main problem, and will cap dividend upside. Nevertheless, M1 is likely to continue paying a good dividend, albeit flat vs FY11. Although M1 is no longer our top telco pick (now favour StarHub), it is still worthwhile holding on to for the dividend. It currently yields a supportive 5.5%.

3Q12 recap. M1’s 3Q12 results disappointed because of higher than expected subscriber acquisition costs (SAC) that depressed EBITDA margin by 2.3 ppt/6.4 ppt YoY/QoQ. SAC rose 16%/29% QoQ/YoY due to a higher mix of high-end smart devices for recontracting mobile customers. As a result, net profit fell 6%/20% QoQ/YoY. On the bright side however, management pointpointed strong growth in tiered 4G plans as the main driver in future.

Strong 4G adoption since Sept launch. M1 launched its 4G price plans on 15 Sep 2012, and has reported a strong subscription rate. According to the company, it added 43,000 4G subscribers in the first month following launch. Assuming no churn-outs, that would be more than three times the number of post-paid net-adds it experienced in the whole of 3Q12. This is consistent with our expectations that M1 will experience a strong 4Q12 following a weak 3Q12.

Mobile data to accelerate. Data accounted for 38% of service revenue in 3Q12, and can be expected to accelerate in 2013 as LTE adoption picks up. As 3G and 4G plans are priced the same, subscribers will increasingly opt for 4G as LTE compatible handsets become available. Further, M1's network is the only one that has nationwide coverage currently. Lastly, M1 is also keeping churn low, as most of 4G net-adds has been recontracts and 10-15% of that has upgraded their plans.

But no scope for dividend surprise. While M1 has opted to maintain FY12 DPS at SGDx, the same as FY11, we do not see scope for dividend upside in FY13 as capex will remain high. FY12 capex is expected to rise from 10% of revenue to 12% of revenue (SGD120m), and FY13 capex is likely to remain high as a 4G spectrum auction is expected to be held next year. Still, DPS is likely to be maintained, supporting downside at the yield of 5.5%.

Source: Maybank Kim Eng Research - 27 Nov 2012