• Met 95% of our FY17 estimate
• 11.4 S-cents in total dividend for FY17
• Maintain HOLD

EBITDA Margin Diluted by Strong Growth in Fixed Services

M1 Ltd’s (M1) 4Q17 revenue fell 2.1% YoY to S$307.2m driven mainly by weaker handset sales (-18.5%) and international call services (- 9.2%) but partly offset by fixed services (+33.0%) and mobile post-paid (+5.8%) revenues. Fixed services revenue growth was driven by a 18.1% YoY increase in customer base supported by a 4.4% increase in ARPU, while mobile revenue growth was mainly driven by higher post-paid customer base and a slight YoY decline in ARPU. Handset sales fell largely on lower sales volume.

4Q17 operating expenses fell 3.6% YoY to S$266.7m largely due to lower handset costs on lower volume. Consequently, EBITDA increased 3.3% YoY to S$74.4m. However, NPAT fell 2.5% YoY to S$31.0m as taxation jumped 35.8% to S$6.6m.

For FY17, revenue rose 1.0% YoY to S$1071.1m driven mainly by fixed services. However, operating expenses grew at a faster pace by 2.2% to S$900.0m due to higher wholesale costs of fixed services on larger customer base. Consequently, FY17 NPAT declined 11.5% YoY to S$132.5m and EBITDA fell 3.1% to S$302.4m, both of which formed ~95% of our FY17 forecasts, respectively.

Exploring Deeper Collaboration on Network Sharing

Looking ahead to FY18, M1 guided for capex to be ~S$120m (FY17: ~S$151m) and intends to maintain its 80% payout ratio dividend policy. In addition, we expect M1 to continue to deliver the multi-year corporate fixed services projects, while working to clinch new ones.

In addition, over the medium to longer-term, M1 will continue to build its foundation to prepare for future 5G network roll-out, as well as continue to explore deeper collaboration, especially with Starhub on network sharing, in order to realize capex savings progressively. M1 has also said it will continue to scale up its ICT capabilities and solutions over connectivity to capture opportunities relating IoT and Smart Nation initiatives.

Expects Earnings to Only Bottom-out Next Year

All considered, with the impending entry of new competitors (i.e. TPG and MVNOs), we expect earnings to only bottom-out in FY19. Hence, as we roll-forward our valuations but lower our FY18F EPS by ~4%, our FV increases from S$1.65 to S$1.70. Maintain HOLD.

Source: OCBC Research - 24 Jan 2018