What is our view?

We are positive on M1 based on the following reasons

1. Stable Earnings and Free Cash Flow. M1 is expected to register stable earnings and generate adequate Free Cash Flow. Rational competition in Singapore ensures this.

2. Positive on data monetizing. We are encouraged by management’s guidance this quarter that 11% of recontracting customers upgraded to higher tiered postpaid plans. 9% of customers also continue to exceed their data allowance. While M1 has not indicated interest in following SingTel’s expected increase in excess data charge to S$10.70, we think it likely for M1 to do so.

3. Strong demand for Dividend yielding stocks. The Telco counters, including M1, continue to offer attractive yields of 4.6%. Weak global economic data in recent months, which were below market’s already-lowered expectations, have also reduced possibility of an earlier spike in Fed rates before CY2015. Equities are also likely to be a better inflation hedge as compared to bonds.

4. Investors’ minimum yield requirement likely lowered. While investors previously demanded higher dividend yields, recent share price performances of the Telcos suggest that investors are increasingly accepting lower dividend yields. Furthermore, the stable earnings and FCF decreases risk of a reduction of dividend payouts.

5. Share price expected to be stable even if Fed rates increase. While an increase in US Fed rates continues to be a potential downside catalyst, as investors demand higher returns, we expect share price to be stable. This is because investors may face inertial to switch portfolio, thus resulting in a lower sell-down rate and lesser downward pressure. The increase in earnings visibility also reduces its equity risk premium, thus justifying a higher share price.

Investment Actions?

Based on the reasons given above, we think that dividend yield will continue to support current share price. An increase in demand for dividend yield would also lead to capital gains. We therefore upgrade to an “Accumulate” rating, with a new TP of S$3.55 based on our DCF model.

Source: PhillipCapital Research - 29 Apr 2013