• NPAT met 26% of our FY forecast
• Still sees moderate earnings growth
• Limited upside from here

Decent start to FY14

M1 Ltd posted 1Q14 revenue of S$240.2m, though down 1.2% YoY and 13.8% QoQ, it still met about 23.4% of our FY14 forecast. Thanks to an improvement in service EBITDA margin to 40.0% from 38.2% in 4Q13 and 39.5% in 1Q13, net profit grew 4.3% YoY and 5.6% QoQ to S$42.8m, or about 25.8% of our full-year forecast. Besides lower handset costs, M1 also benefited from lower traffic expenses. But wholesale costs of fixed services increased due to higher customer base and management expects these costs to rise further as it continues to grow its customer base.

No change to moderate earnings growth outlook

Going forward, management believes that it can continue to achieve moderate earnings growth (within the single-digit range), aided by increased mobile data usage as customers upgrade their smartphone plans. Management notes that already 54% are on tiered pricing, while 16% of them exceeded their data bundles, which now cost twice as much per GB with a higher cap of S$188 versus S$94 previously. M1 has kept its capex guidance at S$130m as it upgrades its network to LTE-Advanced by end-2014. It also plans to launch VoLTE (voice over LTE) in the coming months. In addition, M1 believes that the declining ARPU in its fixed services segment is not "structural", but mainly due to promotions (quarterly due to the trade shows).

Maintain HOLD with unchanged S$3.30 fair value

As the earnings were mostly in line with our forecasts, we opt not to adjust our numbers at this stage. Although post-paid acquisition cost came down, we believe it could rise again with the launch of the Samsung S5 in 2Q and possibly the new Apple iPhone 6 in 3Q. As we are retaining our DCF-based fair value at S$3.30, we see limited upside from here. Maintain HOLD.

Source: OCBC Research - 15 Apr 2014