• 1Q earnings met 22% of FY forecast
• Stable earnings guidance; S$140m capex
• Post-paid ARPUs could trend lower

Slow 1Q16 start

M1 reported its 1Q16 results last night, with revenue slipping 13% YoY (-16% QoQ) to S$257.6m, meeting about 22% of our full-year estimate; this primarily due to lower handset sales (-40% YoY, -45% QoQ). Mobile revenue was also down slightly, -2% YoY and -3% QoQ, mainly due to lower post-paid revenue; this as the increased take-up of SIM-only plans led to a 6% YoY and 4% QoQ fall in post-paid net APRUs to S$51.7/month. Net profit for the quarter dipped 7% YoY and 2% QoQ to S$42.5m, or about 23% of our FY16 forecast; but service EBITDA was flat YoY (-6% QoQ) at S$83.3m.

No change to “stable” FY16 guidance

Despite the slower-than-expected start, M1 continues to guide for “stable” earnings performance in 2016, as it believes it has strengthened its product propositions to attract and retain customers. Some of these include improved SIM-only plans, upsized data bundles and expanded coverage of its roaming data passport countries.

Management also explained that the upsized data bundles could be seen as swapping “ad hoc” revenue (collectable only when customers exceed their data bundles at S$10/GB) for more “certain” recurring income of S$6/month; also notes that the percentage of customers who exceed their data bundles remain low around 20%.

M1 has kept its capex guidance at S$140m for this year, excluding the S$64m spectrum payment due in Sep 2016 and any additional spectrum in the upcoming auction; and further expects to spend similar capex in the next few years.

Last but not least, M1 intends to invest up to 2% of annual revenue in new technologies (likely in early stage companies) to complement its core business, but noted that the benefits may only accrue in future years.

Maintain BUY with new S$2.90 FV

After accounting for the 1Q16 results as well as the potentially lower post-paid ARPU outlook, we pare our FY16 and FY17 earnings forecasts both by 3%. Our DCF-based fair value also dips slightly from S$2.95 to S$2.90; but as there is still a potential total return of 15% from here, we maintain our BUY rating.

Source: OCBC Research - 14 Apr 2016