In line; but Downgrade to SELL from HOLD

• Following M1's 9M18 results which met expectations, we maintain our forecasts and DCF-based (WACC 4.1%, LTG 1%) Target Price of SGD1.63.
• Current M1 share price implies that 2019E onwards EBITDA will be 5-10% higher and EBITDA margins 170-350bps higher than our forecasts. Given earnings downside stemming from increased competition, we downgrade it to SELL.
• Switch to NetLink Trust (SGX:CJLU) in the sector. More benign competition and / or significant opex reductions are risks to our outlook.

In line with expectations of weaker 2H18

• M1's 9M18 consolidated revenue of SGD783m, up 4% y-o-y and 8% q-o-q, formed 73% / 74% of MKE / FactSet consensus, in line. Growth was led by smartphone launches and fixed network while wireless was under pressure.
• 9M18 EBITDA of SGD231m, down 1% y-o-y and 1% q-o-q, formed 79% / 78% of MKE / consensus estimates with a significant drop in marketing expenses and decline in leased-circuit costs offsetting a volume-based increase in other traffic costs.
• Reported 9M18 profit of SGD105m, down 2% y-o-y and 5% q-o-q, was 82% / 80% of MKE / consensus estimates. This is in line as 4Q is typically a heavier-expense quarter.
• Also, unlike prior years, we are bracing for potential pressure from holiday-season promotions from the four MVNOs and / or newcomer, TPG (TPM AU, Not Rated).

Changing habits in face of increasing competition

• For wireless, unlike 2Q18 when there was an ideal situation of a higher postpaid subscriber base and higher postpaid ARPUs, 3Q18 postpaid ARPU declined faster than subscriber growth. The reason was increased popularity of data add-on plans and lower data roaming, which lowered the percentage of subscribers breaching their data caps.
• MVNOs’ lower price points led to the launch of data add-on options by incumbent MNOs.

• Our forecasts do offer (see our 27 Sept 2018 note M1 - Attractive General Offer), as the certainty. Potential changes proposed by unlisted Konnectivity are approval and a majority Offer.
• We believe that its SGD2.06 price captures the impact of planned the long term. Konnectivity has its plans M1’s 80% policy.

Other results highlights

• Although this quarter’s presentation slides did not provide an outlook for the rest of the year, the outlook presented in the 2Q18 results presentation remains intact.
• 3Q’s q-o-q decline in wireless-service revenue stemmed primarily from M1’s MNO business and not from its MVNO-derived revenue from its contract with unlisted Circles.Life.
• A 100bp q-o-q decline to 33% of tiered-plan subscribers exceeding their data caps reflected the increasing popularity of SIM-only plans and data add-on options.
• A significant 33% q-o-q and 43% y-o-y drop in advertising and promotional expense was from savings by veering away from traditional-print to more digital and social-media advertising.
• Competition remained intense in prepaid wireless.