M1  reported  commendable  10%  core  earnings  growth  in  FY14  (4Q14: +10%),  meeting  expectations.  Maintain  BUY  and  SGD4.40  TP  (7% WACC,  21.6%  upside),  supported  by  a  2-year  core  EPS  CAGR  of  11% from  more  subscribers  'tiering-up'  and  enhanced  revenues  from  new smart and cloud solutions. M1 remains our Top Pick for exposure to the Singapore telco sector. Capital management remains a key catalyst.  

In  line.  M1's  FY14  core  earnings  grew  10%  YoY  (flat  QoQ)  to SGD175m,  2-3%  ahead  of  our  and  consensus  forecasts.  Seasonality and strong iPhone 6 sales explained the 38% QoQ (+24% YoY) surge in overall revenue. M1 sustained its 100% dividend payout with a final DPS declared of 11.9 cents/share (FY13: 21 cents/share). This compares withthe previous practice of a special dividend on top of a final payout.   

Key highlights.  Mobile revenue grew 5.3% YoY in 4Q14  (+4.2% YTD), led  by  stronger  postpaid  growth  (+6%  YoY)  as  more  subscribers  recontracted  to  tiered  data  plans  (66%  of  postpaid  subscribers  on  tiered plans),  which saw a SGD2-3/month  ARPU increase in Oct 2014. Mobile internet traffic made up 65% of data traffic as average data consumption grew to 3GB/month in 4Q14 from 2.5GB/month in 4Q13.    

SAC  is counter-intuitive.  M1 said it is subsidising less on  the  iPhones compared  to  a  year  ago.  Although  subscriber  acquisition  cost  (SAC)climbed  11% YoY in  4Q14, this was attributed to the significantly higher volume sales of the iPhones vs lower-priced Android handsets.  

Capex  set  to  moderate.  M1's  capex  of  SGD140m  (4Q14:  SGD39m) was  slightly  ahead  of  its  guidance  of  SGD130m  due  to  lumpy investments in a new data centre and the upgrade to its billing system. It is  guiding  for capex  to moderate to  SGD120m in  FY15  which  includes some investments in fibre. The capex excludes the spectrum payment of SGD64m for the 1,800MHz (FY14: SGD40m for 2,500MHz).  

Forecast.  We make no changes to our FY15-16 forecasts. Key earnings risks are:  i) stronger-than-expected competition,  ii) higher-than-expected SAC, and iii) adequate spectrum resources.

Content  carriage  on  the  back  burner.  M1  has  decided  to  put  on  hold  the application for content carriage until it obtains further clarity on  the  new Broadcasting Act which is under review by the Media Development Authority (MDA). We view this as  a  slight  negative  as  M1  has  met  most  of  the  criteria  for  content  sharing  and  it would have been  able to  capitalise on the  more attractive content ring-fenced by its larger peers  to further shore up its  fibre  broadband  base.  We understand less than 10% of M1's fibre customers are on its pay-TV subscription (M1Box).  

Not averse to mobile virtual network operators (MVNO).  Management is open to potential  tie-ups  with  MVNO  on  the  condition  that  the  market  segments  to  be addressed are not well or adequately covered. It currently hosts two MVNOs.  There were  no  updates  on  the  potential  entry  of  a  fourth  mobile  operator.  We  think  the Infocomm  Development  Authority  (IDA)  is  likely  to  make  it s  stance  known  on  its previous consultation with mobile operators on the allocation of spectrum to improve mobile competition.

 

Source: OSK-DMG