• 2H18 NPAT expected to decline YoY
• Uncertainty ahead remains
• Tapping on Smart Nation initiatives

Strong Contribution by Fixed Services Continues

M1 Ltd’s (M1) 2Q18 operating revenue grew 1.7% YoY to S$253.2m, while that on a 1H18 basis was S$507.3m, comprising 47.7% of our fullyear forecast. For the quarter, mobile telecommunications services saw a 3.8% YoY increase to S$146.2m, arising from an increased postpaid customer base (+34k QoQ) and YoY ARPU growth of 1.2%; postpaid telecommunications revenue consequently grew 5.7% YoY. However, the prepaid segment continued to be a drag, with sales dropping 11.3% YoY to S$13.6m.

Lower traffic also weighed on the international call services segment, as revenue dropped 27.3% YoY to S$10.2m. Fixed services exhibited healthy revenue growth of 27.4% YoY, driven by a 13.6% growth in its fibre customer base as well as contribution from corporate projects. 2Q18’s EBITDA grew 1.4% YoY to S$78.4m, though EBITDA margin (on service revenue) dropped 1.5 ppts to 40.6%.

2Q18’s NPAT grew 1.5% YoY to S$36.2m, while the 1H18 NPAT of S$71.0m constituted 56.8% of our full-year forecast. We deem this set of results to be broadly in-line with our expectations, as profit for the year is likely to be front-loaded.

Headwinds Not Letting Up

We believe management is clearly cognizant of the potential impact arising from TPG Telecom’s impending entry into Singapore in 2H18. This, together with market seasonality, has led the group to expect a 2H18 NPAT YoY decline, which is within our expectations.

Also, while the group is looking to step up its activities in the prepaid market to arrest the decline, we understand that it will be challenging, especially with the incentives being offered by competitors to both the trade and customers. Nonetheless, the group has articulated plans to tap on opportunities offered by the Smart Nation initiatives, leveraging its scaled up ICT and digital capabilities.

In particular, cyber security could be an area of focus moving forward. Also, we believe that M1 remains open to work with other MVNOs that are able to offer unique propositions, especially in tapping niche segments that would otherwise be unserved by the group. With a change in covering analyst, we fine-tune our assumptions, and reduce our terminal growth value from 1% to 0.75%. Thus, we drop our fair value estimate from S$1.70 to S$1.65.

Source: OCBC Research - 30 Jul 2018