Much Is in the Price

• We forecast a 3% CAGR decline in wireless service revenues over 2017- 20E and we think this is largely reflected in M1’s current valuation (Target Price S$1.63 based on DCF).
• The company’s head start in securing a mobile virtual network operator (MVNO) leasing deal with unlisted Circles.Life has and will enable it to temper wireless revenue pressure relative to competitors. 
• We maintain HOLD.

First Mover Cuts Both Ways

Although M1 does not break out its MVNO leasing revenues separately, it is likely that being the first incumbent to capitalize on an MVNO arrangement has driven its industry outperforming wireless service growth in 2017. Arguably, enabling the first real low price competitor into the market may have precipitated industry revenue pressure and may be setting the price bar lower prior to TPG’s (TPM AU) 2H18 launch.

Nonetheless, the move coupled with a new focus on the enterprise market has shown to have relatively paid off for the telco.

Easy Win May be Over

Competitors have since entered into MVNO leasing contracts that may eventually take some of M1’s competitive edge off. However, with M1’s deal with Circles being a volume based one, intensifying MVNO competition resulting in volume uptick will at least initially be beneficial to its MVNO deal. Whether it impacts the core business is the risk.

Our 2018E forecasts are in line with FactSet consensus but we assume a heftier drag in 2019E with the full year impact of TPG’s entry.

Maintain HOLD

We believe that M1’s successful strategy of biting the bullet with its Circles’ MVNO deal will continue to provide a relative benefit in the increasingly competitive wireless sector. There will be earnings pressure but this is largely priced in; in our view, hence we maintain our forecasts and HOLD.

The degree of aggressiveness of TPG and the incumbents’ reaction is the key risk or upside to our outlook.

Swing Factors 

Upside 

• A benign competitive environment or a hasty retreat by new entrants would be an unexpected surprise. 
• Growth in fixed network via fixed broadband and/or enterprise could provide earnings surprises in the medium to long term. 
• Any takeover interest by a new entrant or TPG could trigger a sector re-rating. 

Downside 

• Should TPG resort to handset subsidies to poach subscribers an escalation in incumbents’ own efforts could take place. 
• Higher-than-expected capex pressure as a result of competition and/or 5G rollout. 
• Risks of a more rapid decline in wireless voice, SMS and roaming as data adoption gains momentum. 

Source: Maybank Kim Eng Research - 02 Jul 2018