• Impacted by OTT services
• Earnings to erode with 4th Telco entry
• Lower FV on weaker outlook

Lower handset sales continued into 3Q16

M1 Ltd’s (M1) 3Q16 results missed expectations as revenue fell 10.3% YoY to S$249.1m mainly due to lower handset sales (-28.9%) and weaker mobile revenue (-6.6%). Post-paid and pre-paid revenue in 3Q16 fell 6.1% and 10.4% YoY, respectively, as traditional telecommunications services such as international call and roaming continued to be impacted by over-the-top (OTT) services. Coupled with higher depreciation expenses (+4.2% YoY), 3Q16 EBITDA declined 13.9% YoY to S$74.6m and PATMI plunged 23.4% to S$34.4m. For 9M16, revenue dropped 12.0% YoY to S$747.0m, while PATMI fell 12.6% to S$117.9m, meeting just 70.1% of our FY16 forecast.

4th Telco entry a highly probable scenario

After three applicants submitted Expression of Interest (EOI) documents for the New Entrant Spectrum Auction (NESA) to Infocommunications Development Authority of Singapore (IDA) on 1 Sep, we believe a 4th Telco entry is now a highly probable scenario. Previously, the market had been expecting only two applicants, MyRepublic and OMGTel, to submit EOI to IDA, but Australia-listed TPG Telecom’s (TPG) participation came as a surprise. With fixed broadband track record in Singapore and Australia, as well as ability to fund infrastructure investments, we believe MyRepublic and TPG are likely to receive prequalifications from IDA to participate in NESA to become Singapore’s 4th Telco. IDA has yet to announce its decision on whether any of the applicants will pre-qualify for NESA but is expected to do so in 4Q16.

Maintain HOLD with lower FV

With a change in analyst coverage, we incorporate assumptions to reflect a 4th Telco entry, which in our view is now a highly probable outcome and cut our FY16F/17F PATMI by 8.2%/8.5%. Consequently, on weaker earnings outlook, we lower our terminal growth assumption from 1% to 0.75% while also updating our other DCF assumptions, which decreases our FV from S$2.79 to S$2.25 (cost of equity: 8%). Maintain HOLD, supported by 6.4% FY16F dividend yield.

Source: OCBC Research - 19 Oct 2016