SGX Stocks and Warrants

M1 - Bet On M1 At The “Datarat” Table

kimeng
Publish date: Wed, 17 Jul 2013, 09:10 AM
kimeng
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Maintain BUY. We are still in favour of a switch to M1. Following aboveexpectations 2Q13 results, interim dividend was raised slightly but that is not the main reason to buy the stock. Instead, it is still early days to bet on M1 for (1) the greatest potential upside from 4G adoption which we believe will happen faster and sooner than expected in 2013 and (2) finally the chance to monetise surging data usage in Singapore now that smartphone users have been weaned off the unlimited data bottle. The numbers in 2Q13 results confirm what we saw in 1Q13, and we maintain M1 as our strongest telco BUY and raise our TP (DCF) to SGD3.69.

Above expectations! 2Q13 net profit rose 11% to SGD39.2m, delivering on the promise we saw in 1Q13 when we said that 2013 had the potential to be a good year for M1. 1H13 net profit of SGD80.2m (+6%/13% YoY/HoH) forms 47% of our full year forecast but 50% of consensus. We believe the Street has been too conservative on M1’s FY13 earnings and consensus will go up. Management has maintained its guidance of moderate earnings growth this year. We are forecasting 15.5% growth.

It’s all about mobile. Service revenue continued on a tear, up 8.8% YoY in 2Q13 (+4% in 1Q13), on the back of great growth in mobile (seeing positive YoY growth in postpaid ARPU again) and good growth in fibre (but still constrained and can do better). As expected, M1 is shaping up to be the biggest beneficiary of data monetisation due to its pure mobile earnings base. In fact, 2Q13 results could have been better if not for lower IDD revenue.

Data monetisation pace to speed up. 4G subscribers on tiered plans jumped from 11% of postpaid base in 1Q13 to 15% in 2Q13 while the % of postpaid subs exceeding the bundled cap almost doubled QoQ. About 11% of the 4G users on tiered plans have upgraded to higher value plans, and the impact on ARPU is immediate. 2Q13 postpaid ARPU rose to SGD53.6 from SGD52.9 on average in FY12. Average data usage rose steeply to 3.2GB from 2GB in just a quarter, suggesting that users are breaking free of the bundled cap.

Could do better in fiber. Despite claims that the national fiber-optic network now has nation-wide coverage, the real coverage is only about 30-40% of all households as current connections are only into the MDF rooms of most buildings instead of directly into household units. As more customers exit contracts, the net-add pace should pick up beyond the current 7,000-8,000 per quarter. As such, fiber is another potentially positive catalyst. Despite its newness however, margins are now near optimal.

Source: Maybank Kim Eng Research - 17 Jul 2013

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