• 3Q14 revenue up 3.5%y-y at S$250.2m on higher mobile services, offset by lower international call services. Service revenue was stable y-y at S$206.9m
• Net profit increased 12.9%y-y to S$44.6m for the quarter, primarily due to better margin as a result of lower traffic expenses.
• M1 looking attractive at current share price, impacted by recent overall market sell-off. Growth fundamentals remained firm in our view. Upgrade to “Buy” with TP of S$3.95.

What is the news?

M1 Ltd reported 3Q14 results on 16-Oct-14. Mobile data usage continue to drive mobile revenue, which gained 3.3%y-y at S$167.5m, offset by lower mobile prepaid due to reduction of prepaid card quota from 10 to 3 per person since Apr this year. 61% of postpaid customers are on tiered data plans as of end of 3Q.

International call services revenue continues its decline to S$21.5m on falling retail revenue. Fixed services revenue gained on higher fibre customer base and expiry of promotional discount on fibre broadband plans. Handset sales gained at 20.6%y-y on higher sales volume. Overall EBITDA margin on service revenue improved to 40.8% compared to 37.6% in the previous quarter. Management maintained its guidance for moderate growth in earnings for FY14F.

How do we view this?

3Q14 earnings was above our expectations but we lower our estimated 4Q earnings as we expect higher handset costs from strong interest in iPhone 6/6 Plus. We continue to be positive on M1 and remain optimistic on its continuing growth in mobile and fixed services. Growth continues to be driven by higher mobile data revenue and increasing fibre broadband customer base. M1 has followed SingTel’s lead to waive off any possible excess charges on 4G plans in the future permanently, but has revised its postpaid plans with slightly higher pricing. Perceived downside risks would include further broadband price erosion and a possible new competitor’s entry into the telecom space.

Investment Action

We update our forecasts to lower cost of sales but lower revenue due to lower than expected prepaid revenue and international call services. Given the drop in share price impacted by recent market sell-off and growth fundamentals remained firm in our view, we think M1 is attractive at current share price, with a fwd 12M P/E of 18.4x. We upgrade our rating to Buy with target price of S$3.95 maintained.

Source: Phillip Securities Research - 17 Oct 2014