• 1H17 within expectations
• ARPU still falling
• Downgrade to SELL

Larger Customer Base But Declining ARPU

M1 Ltd’s (M1) 2Q17 revenue grew 4.7% YoY to S$251.6m on the back of higher fixed services revenue (+21.9%) and handset sales (+28.8%) but partly offset by weaker mobile revenue (- 2.1%) and international call services (-8.6%). Fixed services revenue growth was driven by a 21.3% YoY increase in customer base while mobile revenue decline was mainly driven by declining average revenue per user (ARPU) despite a 3.3% YoY growth in total mobile customers.

2Q17 operating expenses, however, rose at a faster pace of 9.9% to S$210.1m, driven mainly by higher handset costs, and higher wholesale costs of fixed services. Consequently, NPAT fell 20.8% YoY to S$32.5m while EBITDA declined 10.7% to S$73.4m. For the half year, while revenue rose 2.9% YoY to S$512.3m, NPAT declined 17.6% to S$68.6m and EBITDA fell 7.8% to S$152.4m, which formed 49.0% and 48.0% of our FY17 forecasts, respectively. M1 declared an interim dividend of S$0.052/share, down from S$0.07/share a year ago.

No Acceptable Deals Brought to Majority Shareholders

M1’s three major shareholders, Axiata Group, SPH, and Keppel Telecommunications & Transportation, announced last evening that they have decided not to proceed further with the strategic review of their stakes in M1. According to the announcement, they have taken into consideration the proposals from interested parties, which despite a favourable level of interest, are not deemed acceptable by the three majority shareholders. They also clarified that no arrangement or agreement with any third party has been reached in relation to each of the three major shareholders’ respective stakes in M1.

Share Price No Longer Supported by Potential Takeover Scenario

In our view, M1’s share price has been largely supported by this potential takeover scenario and without this support, we believe M1 should trade based on its fundamentals. Looking ahead, we expect the competitive landscape to worsen with TPG’s entry and also with MyRepublic’s intent to launch mobile services as MVNO in Singapore. On weak earnings outlook, which translates to lower dividends ahead, we downgrade M1 from Hold to SELL with FV of S$1.75 (prev: S$1.96).

Source: OCBC Research - 19 Jul 2017