Within expectations. Following a strong performance in 3Q13, we raise our DCF-derived target price from SGD3.69 to SGD3.98 as we believe M1 could pay a special dividend of up to 7 cents a share on top of the regular full year dividend of 14.8 cents. If it does, dividend yield would rise to an attractive 6.3%, inline with the SREITs. Another catalyst would be BPL cross-carriage. If M1 succeeds in its bid, this will be a huge boost to its Pay TV business. Maintain BUY on M1.

Strong followthrough. 3Q13 net profit rose 19% YoY to SGD39.5m, following through on the good results of the past two quarters. In fact, results would have been stronger if M1 had not provided for an IDA fine of SGD1.5m from a network failure it experienced in Jan 2013 that affected 250,000 of its mobile subscribers for more than 60 hours. Adjusted for this, 3Q13 net profit would have grown 20% YoY and 9M13 net profit would have accounted for 72% of our full year forecast.

Key data driver still intact. Despite a dip in postpaid ARPU, the trend  of rising data monetisation is still very much intact, as can be seen from the continued rise in data contribution, now at 42.3% of service revenue, as well as the number of subscribers who have switched over to tiered data plans (32% of postpaid base, up 5ppt QoQ) and continue to bust through their data caps (5.1% of postpaid base, up 1.2ppt QoQ).

Limited impact from iPhone 5S. EBITDA margin rose YoY and QoQ to 37.7% in 3Q13 as lower subscriber acquisition and handset costs fell while the market waited for the iPhone 5S. We are optimistic the impact will be smaller than before, as (1) M1 reported that volume demand for the 5S is lower than the 5, and (2) most of Apple’s supply is being soaked up by China and Japan. M1 has maintained its full year guidance of “moderate” earnings growth.

Two catalysts to look forward to. One, M1 expects to be able to cross carry BPL by mid 2014 if it achieves the minimum 10,000 MiBox subscribers it needs to qualify. Being able to cross carry BPL will be a huge coup for M1, kickstarting its fledgling Pay TV business. Two, M1 may pay a special dividend this year as net debt/ EBITA is at a record low 0.6x and capex should be stable next year. If it gears up to 0.8x, this could add another 7 cents to our full year forecast of 14.8 cents.

Source: Maybank Kim Eng Research - 16 Oct 2013