• FY16 slightly missed our expectations
• Dividend cut on weaker earnings
• Muted mobile business outlook

Impacted by lower handset sales and mobile revenue

M1 Ltd’s (M1) 4Q16 NPAT plunged 27.1% YoY to S$31.8m as higher operating expenses (+8.5%) eroded the 1.9% growth in operating revenue. 4Q16 revenue growth was driven mainly by higher handset sales and fixed services while increase in operating expenses was driven mainly by higher handset costs due to higher volume and average unit cost.

For FY16, revenue fell 8.3% to S$1060.9m mainly due to lower handset sales (-23.7%) and weaker mobile revenue (-4.2%) but offset by higher fixed services revenue (+21.4%) on higher fibre customer base. FY16 post-paid and pre-paid revenue fell 3.6% and 8.6%, respectively, as traditional telecommunications services such as international call and roaming continued to be impacted by over-the-top (OTT) services.

As FY16 operating expenses fell by only 6.3% to S$880.9m, EBITDA declined 8.7% to S$312.1m. Consequently, NPAT slightly missed our expectations as it plunged 16.0% to S$149.7m, and formed 97.0% of our FY16 forecast.

Investing for longer-term growth

In our view, M1’s near to medium term outlook will likely be muted on 1) intensifying competition within Singapore’s mobile services segment with TPG ramping up as the 4th Telco, and 2) declining relevance of traditional telecommunication services with the increasing adoption of OTT services.

Fixed services segment remains the only bright spot but unlikely to offset the weak mobile segment outlook. While data usage has increased to 3.6GB/month in 4Q16 from 3.3GB a year ago, we believe data revenue growth will be moderated by competitively priced data offerings, especially with TPG coming into the picture.

While management has highlighted that M1 will continue to invest to grow its portfolio with Internet of Things (IoT) services, smart nation initiatives and data analytics capabilities, we expect these investments to take time to bear fruits, driving growth only over the longer-term horizon.

Maintain HOLD with lower FV

Based on 80% payout ratio, M1 cut its FY16 final dividend to 5.9 S-cents from 8.3 S-cents in FY15, reflecting weaker earnings. On missed earnings and muted outlook, we cut our FY17F PATMI by 5.3%, which decreases our FV estimate from S$2.08 to S$2.03. Maintain HOLD.

Source: OCBC Research - 25 Jan 2017