• Weaker earnings outlook
• Cut ARPU assumptions
• Downgrade to SELL

Large exposure to Singapore mobile market

Among the incumbents, M1 Ltd (M1) has the largest exposure to the Singapore mobile market as a proportion of total revenue. Based on M1 FY16 results, ~ 90% of its revenue is exposed to the Singapore mobile market, which we define as the sum of mobile service revenue, handset sales and international call services revenue. The remaining 10% of its revenue in FY16 was derived from the fixed services segment. In our view, with the impending entry of TPG as the 4th telco to offer mobile services in Singapore, we expect the earnings impact on M1 to be the largest among the incumbents.

Expects post-paid ARPU to fall 16% over five years

With TPG expected to launch mobile services in 2018, we expect M1 to engage in aggressive marketing campaigns and promotional activities to try to gain market share by locking in customers on new two-year contracts before TPG starts to offer mobile plans. In addition, Singapore’s only Mobile Virtual Network Operator (MVNO), Circles.Life, recent aggressive promotion offers new customers additional 20GB at only S$20 will, in our view, put even greater pressure on the incumbents to respond with similarly attractive data-focused price plans as well.

Hence, we are forecasting for M1’s postpaid ARPU to decline 16% over the next five years. While M1 will continue to invest to growits portfolio with capabilities relating to Internet of Things (IoT) services, smart nation initiatives and data analytics, we do not expect material growth from these investments in the near to medium term.

Paring down our forecasts

With the General Spectrum Auction (GSA) still targeted to complete by 1Q17, we expect M1 to exercise its right of first refusal for 2x5MHz of 900MHz spectrum for S$20m, win 2x10MHz of 700MHz spectrum for S$60m, and win 2x10MHz of 2.5GHZ spectrum for S$9m. As we update our assumptions, we cut our FY17/18F PATMI by 3.7%/5.6%. Consequently, on lower FV of S$1.75 (prev: S$2.03), we downgrade M1 from HOLD to SELL. The weaker earnings outlook also translates to lower dividends over the next five years based on 80% payout ratio.

Source: OCBC Research - 17 Mar 2017