• Mobile market getting crowded
• Declining dividend yields
• Upgrade to HOLD on valuation grounds

Exposure to Singapore Mobile Remains Significant

In recent weeks, competition in the Singapore mobile market has heated up further as M1 Ltd (M1) and Starhub launched new plans that offer unlimited data for consumers, in different ways. In our view, the launch of unlimited data plans by the two telcos could be in part due to MyRepublic’s announced intention to launch mobile services with generous data offerings as a Mobile Virtual Network Operator (MVNO) as early as Oct 17.

Based on M1’s 1H17 results, ~88% of its revenue remains 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 12% of its revenue in 1H17 was derived from the fixed services segment.

While M1 has highlighted it will focus on investing in digital solutions as well as develop new ICT and cloud-based solutions, we believe these new revenue streams will not become material enough in the near to medium term to offset the declining mobile earnings. Hence, with the intensifying competition and given M1’s significant exposure to the Singapore mobile market, we expect the outlook for M1 to remain challenging until its enterprise segment is substantial enough to offset the expected declining earnings.

Dividend Yield to Fall Alongside Declining Earnings Ahead

The result of heightened competition as the mobile market gets more crowded is likely exerting greater pressure on ARPU, which is already on a downward trend. We believe with the impending entry of TPG and MyRepublic, M1 will likely continue to engage in aggressive marketing campaigns and promotional activities to try to gain or at least retain market share by locking in customers on new contracts. Hence, we are forecasting for M1’s post-paid ARPU to decline ~20% over the next five years.

Consequently, as we update our assumptions, our FV decreases from S$1.75 to S$1.65. However, given the steep decline of more than 14% since its 2Q17 announcement, we upgrade M1 from SELL to HOLD on valuation grounds.

Source: OCBC Research - 11 Sept 2017