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M1 - Earnings Set To Grow by Mid Single Digit

kiasutrader
Publish date: Wed, 22 Jan 2014, 10:25 AM
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.
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.  

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Company Profile
M1 is the smallest mobile operator in Singapore and is an associate company of Malaysia-listed Axiata.

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Source: OSK
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