FY18 and 4Q18 Below Consensus. Maintain SELL

• M1 LIMITED (SGX:B2F) recorded a softer 4Q18 that missed consensus net profit by 7% but beat ours by 15%. We raise our 2019-21E profit forecasts and our DCF based (WACC 4.1%, LTG 1%) Target Price by 9% to SGD1.77.
• We do not forecast any potential changes if unlisted Konnectivity is able to take majority control after its 18 Feb 2019 VGO. As such, the stock remains a SELL and we continue to recommend investors avail of the offer at SGD2.06.
• A quick turnaround in the highly competitive environment is the upside potential to our outlook.

Higher Subsidies and Staff Costs

• Although total revenues beat both FactSet consensus and MKE estimates for the FY and quarter, this was driven by equipment sales as wireless service revenues were down q-o-q and y-o-y. Although part of equipment sales is accounted for by contract revenues, net of handset costs, subsidies increased in the quarter.
• Meanwhile, a significant 17% q-o-q/12% y-o-y increase in staff costs from bonus provision and expansion in corporate segment hires also pressured the results.

No Guidance Until There Is VGO Clarity

• There was no earnings, capex and payout guidance for 2019E as management awaits the results of the VGO.
• We have assumed that M1 can maintain its 80% dividend payout policy even though the balance sheet will be pressured from a SGD188m license fee payment for the 700Mhz it was awarded in 2016.

Earnings and Target Price Revised Up But Not Enough

• We raise our 2019E/20E/21E revenue forecasts by 1%/2%/2% leading to higher profits of 19%/21%/14% and a higher Target Price. Nonetheless, our profit forecasts and Target Price translate to non-compelling dividend yields at current levels.
• If Konnectivity gains control and implements structural changes to revenue generation and costs, this would be an upside to our base case.

Source: Maybank Kim Eng Research - 29 Jan 2019