Towards Financial Freedom
M1 - Earnings Set To Grow by Mid Single Digit
M1's results were in line with our and consensus estimates. The special dividend capped a decent FY13 that saw it booking the strongest mobile revenue growth among peers. As half of M1's postpaid subscribers are on tiered data plans, we expect it to better monetise data going forward. We fine-tune FY14 forecasts and introduce FY15 numbers. FV is raised to SGD3.65 (from SGD3.25). Upgrade to BUY.
- In line. At 99% of our and consensus estimates, M1's FY13 core earnings were in line. The results were characterised by lower handset sales (-33% y-o-y), which pulled down overall revenue, but its service revenue (excluding handsets) ticked-up a promising 6.3%, driven by the 6.1% and 28% growth in mobile and fixed services topline respectively.
- Margins held up due to fair value accounting. M1's fair value treatment on the iPhone has clearly worked in its favour, contributing to the higher EBITDA margin q-o-q. Despite the earlier supply bottlenecks on the iPhone, M1 said the sales mix between Android handsets and iPhone sales were evenly distributed, as the latter's stocks were quickly replenished in 4Q13 to meet demand.
- Half of postpaid subs on tiered plans. M1 said it hopes to capture better profitability on data with the higher adoption of tiered plans (4Q13: 49%; 3Q13: 32%) and increased smartphone adoption. It will continue to strike a balance between profitability and market share, with the focus on driving long-term subscriber value. Management expects the higher data uptake to offset the dilution in ARPU arising from weaker voice and roaming revenue, and SMS substitution.
- Special DPS. M1's 7.1 cents/share final and special DPS brings total DPS for FY13 to 21 cents/share, reflecting a combined payout of 120%. There is scope for further capital management, as its capex is expected to be steady and net/debt EBITDA remains low.
- Upgrade to BUY with FV raised to SGD3.65 (from SGD3.25). This is after rolling forward our DCF valuation. M1 remains our Top Pick for exposure to the Singapore telco sector.
Other Key Highlights
Value offering. M1 believes its SGD39/month 200 megabit per second (Mbps) plan - the lowest priced fibre broadband plan in the market - still presents a good value proposition to subscribers. Management is not overly concerned about the recent promotion by MyRepublic Pte Ltd, which introduced a SGD49.99/month package that offers a 1 gigabyte per second (Gbps) line, as it does not believe the pricing is sustainable.
Value offering. M1 believes its SGD39/month 200 megabit per second (Mbps) plan - the lowest priced fibre broadband plan in the market - still presents a good value proposition to subscribers. Management is not overly concerned about the recent promotion by MyRepublic Pte Ltd, which introduced a SGD49.99/month package that offers a 1 gigabyte per second (Gbps) line, as it does not believe the pricing is sustainable.
Content carriage. M1 said it is on track to meet the required number of Internet protocol television (IPTV) subscribers to qualify for content cross-carriage. The regulator had previously set the minimum number of IPTV subscribers for an operator to be eligible at 10,000, a target that M1 hopes to achieve by mid-2014. LTE-A upgrade to be completed by end-2014. M1 is expected to complete its network upgrade to LTE-Advanced (LTE-A) by year-end. The rollout of its 3G network on the 900 megahertz (MHz) spectrum is expected by end-1Q14. Guidance. Management is guiding on: i) core earnings to grow by "mid single digit", ii) capex of SGD130m, and iii) spectrum payment of SGD40m for FY14. While it has maintained its 80% payout policy on dividends, M1 will undertake regular review of its capital requirements. We think there is still scope for further capital management,given the significantly under-leveraged balance sheet of the group.
Forecast & Recommendation
We trim our FY14 core earnings by 9.7% to reflect lower handset sales and management's latest guidance. FY15 forecasts have also been introduced. Our FV rises to SGD3.65 (from SGD3.25) after rolling over our DCF valuation and attributing a lower WACC of 8% (from 9%) to factor in capital management prospects and the improved data monetisation opportunities going forward. M1 remains our Top Pick for exposure to the telco sector in Singapore.
Financial Exhibits
SWOT Analysis
Company Profile
M1 is the smallest mobile operator in Singapore and is an associate company of Malaysia-listed Axiata.
M1 is the smallest mobile operator in Singapore and is an associate company of Malaysia-listed Axiata.
Recommendation Chart
Source: OSK
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