An indirect  'beneficiary' of the iPhone. The overwhelming demand for the  recently  launched  Phone  6  (IP6)  and  tight  supplies  for  the  larger screen  iPhone  6+  (IP6+)  in  Singapore  suggests  a  likely  shift  in  the Android  dominated  handset  sales  mix  for  4Q14/1QFY15.  This  should indirectly benefit  M1  as it books upfront revenue from  iPhone  contractsto artially offset the device subsidy (fair value accounting), which should result  in  a  smaller  EBITDA  impact  vs  its  larger  peers.  M1‟s  EBITDA margin as a percentage of service revenue grew 1-6  ppts  q-o-q in 4Q12 and 4Q13 during the launch of the previous iPhone 5  (IP5)  and iPhone 
5s (IP5s) respectively.

Firing the latest fiber salvo. M1 recently slashed the price of its 1Gbpsfiber plan  by 50% to  SGD49.00/month, marginally undercutting  a similar plan  offered  by  MyRepublic.  While  there  are  concerns  that  the  latest move  could  lead  to  further  value  destruction  in  the  fixed  broadband space via  a fresh round of price competition,  we  view this as  a  tactical response  to  strengthen  M1‟s  triple-play  bundling  proposition  and  an attempt to  narrow the gap with its larger  peers,  which are aggressively locking-in customers on multiple services. Being the smallest of the Tier-1 fiber service provider, M1 stands to gain somewhat from competition 
with  no  legacy  broadband  revenue  to  cannibalise.  Its  home-bundling proposition should be catalysed by the implementation of cross-carriage,which should allow pay-TV subscribers to access premium content. 

Data  monetisation.  We  expect  M1  to  better  monetise  data  going forward  with  the  recent  introduction  of  fresh  4G  plans  and  higher  data consumption,  resulting in more customers exceeding their bundled data allowances. Subscribers on M1‟s previous tiered plans will also  likely  be subjected  to  a  4G  VAS  surcharge  after  31  December,  providing  some average revenue per user (ARPU) uplift.

Bigger  than  bigger.  Singaporeans  were  among  the  first  in  the  world  to  lay  their hands  on  the  IP6  and  IP6+  on  19  Sept.  Unlike  the  IP5  and  the  IP5s-  a  mid-life refreshed model-  we  expect  sales of  the  latest  iPhones  to  hit  a new  record  going by the  overwhelming  pre-orders received  ahead of the global  launch  and the over 10m units sold during the first weekend (ahead of the 8m first weekend sales  of IP5).  Our channel  checks  and  anecdotal  observations  suggest  that  the  IP6+  (larger  5.5" screen)  is  the  more  popular  of  the  two  new  models  with  stocks  having  run  out  in Singapore. The Wall Street Journal  had  earlier reported supply issues  with the IP6+,which could well extend the delivery lead times. The IP6 and IP6+ retail in Singapore for SGD988 and SGD1,148 off-contracts respectively for the entry level 16GB model.However,  new  or  re-contracting  subscribers  stand  to  reap  generous  subsidiesaccorded by the operators, ranging from SGD400 to SGD1,200.

 

M1's  4G/iPhone  plans  offer  the  best  bang  for  the  buck.  A  comparison  of  the various  iPhone/4G packages  by the telcos  revealed  that  M1‟s plans offer the lowest total cost of ownership (TCO). This is due to the greater savings achieved on monthly commitments  over  the  contract  period,  which  more  than  offset  the  lower  upfront device subsidy (see Fig. 2). M1 charges SGD41/month for a 3GB plan  (bundled with 200  voice  minutes  &  1,000  SMS),  which  is  slightly  lower  than  the  corresponding plans  (for the same data  allowance)  retailed by StarHub (STH SP, NEUTRAL, TP: SGD4.20)  at  SGD42.90/month  and  SingTel  (ST  SP,  NEUTRAL,  TP:  SGD3.82)  at SGD62.90/month.  SingTel‟s  Combo  4  plans  include  a  complementary  Wi-Fi broadband with unlimited data valid until 30 July 2015, and capped at 2GB thereafter.

 

SAC  likely  to  trend  higher  but  M1  should  indirectly  benefit  from  fair  value accounting.  We  expect  a  seasonal  pick-up  in  industry  subscriber  acquisition  cost (SAC)  in 2H2014, coinciding with  new handset launches  and  the  festive promotions. 

This  will  exert renewed pressure on the telco‟s  EBITDA margin,  notwithstanding  the improved data monetisation  efforts. SingTel,  StarHub and M1‟s EBITDA margins (as a percentage of overall revenue)  fell by  2-5  ppts  q-o-q in 4Q12 and 4Q13  following the launch of the IP5 and IP5s in Sept 2012 and Sept 2013 respectively, as illustrated in  Fig.3.  M1,  nonetheless,  exhibited  an  improvement  in  absolute  EBITDA  (and service  EBITDA  margin)  over  the  same  period  due  to  the  adoption  of  fair  value accounting, which suppresses the impact on margins (Fig. 5)We note  that  the overall  SACs of the operators  have been on a  steady  decline  over the  past  few  quarters  due  to  lower  handset  volumes,  higher  demand  from  shared data plans (which do not qualify for handset subsidy)  and  stronger  off-take of  lower priced Android models such as the Xiaomi, Huawei and HTC (2498:TT, NR) .

An analysis of the various 4G plans  in the  market revealed  that the telcos continued to  maintain  a  fairly  generous  level  of  subsidy  on  the  IP6/6+  with  payback  period averaging 9-11 months. This compares with the  6-7months  average  for an Android handset. 

Firing  the  latest  salvo.  Competition  within  the  fixed  broadband  segment  remains intense  with M1  being the latest to cut prices.  It slashed  the price of its  1Gbps fiber plan  to  SGD49.00/month  (from  SGD129/month),  marginally  undercutting  the SGD49.99/month  charged  by  MyRepublic,  a  pure  fiber  broadband  operator.  This makes  M1‟s  plan  the  lowest  priced  1Gbps  fiber  broadband  service  in  the  market. M1‟s move comes shortly after SingTel,  which  had in August introduced an  unlimited 
1Gbps offering for SGD69.90/month. While the sharp price discounting  has raised concerns of further value destruction in the fixed broadband segment,  we  believe:  i)  M1 may be  accelerating efforts to sign up more subscribers on its own  home bundle, given that its  larger  peers  have been aggressively locking  in customers  and  ii) it is courting pay-TV subscribers  ahead of the  implementation  of  cross-carriage.  M1‟s  fiber  plan  is  bundled  with  a complementary fixed voice service and a 12 month pay-tv subscription (MiBox) which is similar  to  SingTel‟s  "mio-  Home‟  and  StarHub‟s "HomeHub‟.  It is  also throwing a free 1GB mobile broadband subscription. would be  compelled  to lower prices to remain competitive. StarHub  had previously stated its intention to maintain its broadband market share  and is incentivised  to sign up more fiber subscribers due to a fiber broadband grant from the Government. Overall, we  believe there would be  no let-up in competition  in  the  fixed  broadband segment  as  the  telcos  compete  to  lock  in  customers  via  triple  play  offerings   in ensuring APRU stickiness in the longer-term. 

Superior  mobile revenue growth, thanks to upward adjustment to excess data charge. M1‟s postpaid ARPU has held up relatively well following the re-pricing of its tiered data plans  at the start of the year. The telco doubled  its  excess data charge to SGD10.70/month  from  1  Jan,  which  contributed  to  the  stronger  mobile  revenue growth of  4.1% in 1H2014  vs  the  industry‟s 2.2%.  M1  has the highest proportion of postpaid customers on tiered plans, at 58% vs  54-57% at StarHub and SingTel with 20% of these  subscribers having exceeded their bundled data (SingTel and StarHub averaged 18%). It  appears to be less  impacted  by the  structural  revenue  pressure in the prepaid segment,  with the latter making up only 12% of mobile revenue vs  the estimated 18-20% for its rivals.

 

Data monetisation.   M1‟s  new 4G plans does away with the controversial  4G value added service (VAS)  surcharge  on  its previous  tiered pricing  plans (Value Surf, Lite Surf+, Extreme Surf+ and Max Surf+). Existing subscribers can choose to remain on the older  plans  although they would be subject to a  4G VAS surcharge from  1 Jan 2015. We  believe  subscribers  would be compelled to  re-contract  on  to  the  new 4G plans,  which  would  allow  them  to  purchase  a  new  subsidised  handset  and  avoid paying the surcharge when they come off their two-year contracts. Forecasts  lowered slightly.  We trim  our FY14 and FY15 forecasts by 2-3% after moderating  our  subscriber  growth  assumptions  and  assuming  a  more  competitive 2H2014 to factor  in headwinds in the  broadband and mobile segments. We estimate the proportion of postpaid subscribers on its tiered data plans to widen to 70% and 85%  in  FY14  and  FY15  from  49%  in  FY13,  with  25%  and  30%  exceeding  their bundled  data  respectively.  This  would  drive  a  projected  mobile  revenue  growth  of 5.9% for FY14 and 7.3% for FY15 from 6.1% for FY13. 

The factors  that  would put our earnings forecasts  at risk:  i) stronger-than-expected competition  in  the  mobile  and  fixed  broadband  segments,  ii)  higher-than-expected capex  and  iii)  an  acceleration  in  SAC.  M1  had  previously  reaffirmed  its  FY14 guidance  of  "moderate  net  profit  growth‟  and  capex  of  SGD130m,  which  include  a new  billing  system  and  the  construction  of  a  data  center.  We  expect  capex  to moderate  to  about  SGD90m  for  FY15,  consistent  with  its  regular  run-rate maintenance capex. This excludes  the payment of SGD40m for  a  2x20MHz of the 2500MHz spectrum.

Valuation and recommendation 
Maintain  BUY,  DCF  FV  lowered  slightly  to  SGD4.20.  Following  the  marginal downward revision to our forecasts, we lower  our DCF-derived FV to SGD4.20 (from SGD4.30),  premised on 7% WACC and terminal growth of 1.5%.  We like M1 for its stronger mobile revenue traction  and  good data monetisation efforts  as well as the potential  upside  from  greater  bundling  activities  with  the  implementation  of  cross carriage.  The strong demand for the IP6/IP6+ is positive  for M1 due to the adoption of  fair  value  accounting,  which  should  see  its  service  EBITDA  margin  (excluding handset sales) grow at the expense of its rivals. While there are concerns over value destruction in the fixed broadband segment from price competition,  we note that this is  mainly  confined  to  the  upper  end  of  the  market,  and  in  our  view,  unlikely  to generate into a full-blown price war. M1  remains  one  of  our  top  regional  picks  and  our  Top  Pick  for  Singapore  telco exposure.  Share  price  downside  will  likely  be  supported  by  its  attractive  dividend yield of 5.8% for FY14/FY15. 

 

Source: OSK-DMG