• Growing fixed services contribution
• Still awaiting formal offer
• FV of S$2.06

Broadly In-line 3Q18 Results

M1’s 3Q18 results were broadly within our expectations. Operating revenue grew 10.1% YoY to S$274.6m, boosted by the group’s fixed services and handset sales. Mobile telecommunications services was down slightly by 0.1% YoY to S$142.6m, with the group’s postpaid segment (+1.4% YoY) offsetting the declines in the prepaid segment (-12.8% YoY).

The group continues to grow its postpaid customer base (+7.1% YoY) with 20% of these on SIM-only plans; this is up 3%pts QoQ, which points towards strong contribution from Circles.Life, in our view. Fixed services revenue grew 25.9% YoY to S$37.8m due to a higher fibre customer base, as well as contribution from corporate projects.

On the back of higher operating expenses, the group’s EBITDA margin (on service revenue) dipped by 2.3% pts YoY to 40.6%, though this has been largely stable for 3 consecutive quarters now. All considered, NPAT fell 5.5% to S$34.5m, representing 27.6% of our full-year forecast.

Same Opportunities and Challenges

Moving forward, we believe that the group will continue its existing strategy of leveraging on opportunities arising from the government’s Smart Nation push, and also making inroads into the cyber security space. Separately, TPG Telecom (TPG) believes that they should be on track to achieve the required outdoor service milestone of coverage by end-2018 in Singapore.

While it remains a toss-up whether commercial services can thus commence before the year is out, we still expect sharp pricing on TPG’s introductory plans to weigh on the incumbents’ postpaid ARPUs moving forward.

The Elephant in the Room Remains Unaddressed

Keppel Corporation Limited (KEP) and Singapore Press Holdings Limited (SPH) are still awaiting approval from the IMDA before making a formal offer - this could take another month, based on the indicative timeline.

We are still of the opinion that the cash offer of S$2.06 per share presents value to existing M1 shareholders, especially since dividends would likely be cut should the offer go through.

Notwithstanding that, we are cognizant that there is still time for

1. Axiata Group to submit a competing bid, and/or
2. KEP and SPH to raise their offer price to seal the deal.

In view of the current corporate action, we raise our FV from S$1.65 to S$2.06.

Source: OCBC Research - 25 Oct 2018