• Lower mobile revenue
• Mobile ARPU still falling
• Keeping forecasts largely unchanged

Strong fixed services growth partly offset by fall in mobile revenue

M1 Ltd (M1) reported a set of in-line 1Q17 results as revenue grew 1.2% YoY to S$260.7m on the back of higher fixed services revenue (+22.4%) and handset sales (+9.2%) but partly offset by weaker mobile revenue (-3.5%) and international call services (-10.9%). Fixed services revenue growth was driven by a 23.6% YoY increase in customer base while mobile revenue decline was mainly driven by declining ARPU despite a 5.4% YoY growth in total mobile customers.

1Q17 operating expenses, however, rose at a faster pace of 4.3% to S$214.1m, driven mainly by higher: 1) handset costs, 2) wholesale costs of fixed services, 3) staff costs, and 4) depreciation and amortisation. Consequently, PATMI fell 14.6% to S$36.3m while EBITDA declined 5.1% to S$79.0m, with the latter forming 24.6% of our FY17 forecast. 1Q17 EBITDA margin (on service revenue) came in at 39.2% compared to 40.9% in 1Q16 and 35.8% in 4Q16.

Spectrum secured at recent GSA cost S$208m

At the recent general spectrum auction (GSA), M1 secured 2x10MHz of 700Mhz (S$188m) and 2x5MHz of 900Mhz (S$20m) spectrum at a total cost of S$208m, and will be able to start using the latter from Jul 17 onwards. Currently, it remains unclear when the 700Mhz spectrum will be made available. Hence, we incorporate assumptions for M1 to make payments for the 2x10MHz of 700Mhz and 2x5MHz of 900Mhz spectrum in FY17 and FY18, respectively.

While the other three telcos managed to secure the 2.5GHz spectrum, M1 said they do not require this bandwidth as: 1) it will use small cell/WiFi HetNet deployment to deliver superior data experience, 2) it will re-farm part of 3G spectrum to use for 4G, and lastly, 3) it is costly and complex for M1 to use the 2.5GHz unpaired spectrum on existing paired spectrum networks and infrastructure.

Maintain HOLD with unchanged S$1.96 FV

In our view, M1’s current share price is still largely supported by a potential takeover transaction as its major shareholders conduct strategic review of their stakes. On largely unchanged forecasts apart from incorporating the most recent spectrum auction outcome, maintain HOLD on M1 with the same FV of S$1.96.

Source: OCBC Research - 18 Apr 2017