• 1H earnings met 47% of estimate
• M1 sees single-digit earnings decline
• Limited upside from here

2Q16 results weighed by lower handset sales

M1 reported its 2Q16 results last Friday, with revenue falling 13% YoY (-7% QoQ) to S$240.4m, after handset sales tumbled 50% YoY (-33% QoQ). But we note that its core mobile business also saw a slight 2% YoY (flat QoQ) slide; this mainly due to the 7% YoY (-4% QoQ) fall in pre-paid revenue, while post-paid revenue was down 2% YoY (flat QoQ). While EBITDA only saw a smaller 2% YoY (-1% QoQ) fall to S$82.2m, higher depreciation expenses (+9% YoY, +3% QoQ) resulted in net profit slipping by a larger 7% YoY (-4% QoQ) to S$41.0. For the half year, revenue dropped 13% to S$498.0m, meeting just 43% of our full-year forecast, while net profit fell 7% to S$83.5m, or about 47% of our FY16 estimate. M1 declared an interim dividend of S$0.07/share, unchanged from a year ago.

Slashes FY16 earnings guidance

And in line with the slightly weaker-thanexpected showing in 1H16, as well as the increasing adoption of OTT services and its impact on traditional telecommunication revenue, M1 has now slashed its FY16 earnings guidance from “stable” to single-digit decline in net profit. However, it has maintained its capex guidance of S$140m for this year, excluding the S$64m spectrum payment due in Sep 2016 and any additional spectrum in the upcoming auction.

M1 says it will continue to enhance its service propositions, with investments in new technologies and capabilities to build a portfolio of digital solutions to capture emerging growth opportunities; however, these investments are likely to bring about higher depreciation and amortization expenses in the near term, and hence also weighing on margins.

Downgrade to HOLD with S$2.79 FV

In line with its more muted outlook, we have cut our FY16 earnings forecast by 6% and FY17 by 5%; our DCF-based fair value also drops from S$2.90 to S$2.79, even though we slashed our discount rate. Given the limited upside, we downgrade our call to HOLD as well.

Source: OCBC Research - 18 Jul 2016