M1 - DBS Research 2016-09-22: Unexpected entry woes the mobile market

M1 - DBS Research 2016-09-22: Unexpected entry woes the mobile market M1 LIMITED B2F.SI

M1 - Unexpected entry woes the mobile market


M1 to be most impacted from the entry of a 4th operator. 

  • We believe the entrance of a new player will be most felt by M1 due to its higher exposure to mobile revenue and a more price sensitive subscriber base. 
  • We project M1’s mobile revenues to contract by 20% from 2015 levels with a 25% drop in earnings by 2022.



2Q16 net profit of S$ 41.0m (-13% y-o-y, -7% q-o-q) was 3% below our expectations. 

  • Accrued handset revenue decreased ~S$12m in 2Q16 to S$74 m from S$86m in 1Q16 due to lower iPhone sales. As M1 uses fair value accounting for iPhone sales, this has had an adverse impact on revenue and profits. 
  • M1 downgraded its official guidance from stable net profits to a single-digit decline in FY16.


An aggressive 4th player could capture ~ 7% of revenue share by 2022. 

  • Both MyRepublic and TPG have a reputation of capturing subscribers through price competition, albeit in the fixed broadband segment. 
  • With competitive battles ahead, we project mobile revenue in Singapore to drop by 4% to S$3.94bn in 2022 versus 2015. A well-funded player could capture up to 7% revenue share by 2022 in our estimates.


Valuation

  • Recommend FULLY VALUED from HOLD earlier. 
  • Our revised DCF (WACC 6.8%, terminal growth 0%) based TP is S$2.15.
  • We switch to our bear-case scenario of a well-funded 4th player and in the face of potential earnings decline, we think forward PER multiple could well shrink to 12x (below -2SD) versus 14x now.


Key Risks to Our View

  • Non-entry of a new player. Disqualification of the current candidates due to inadequate funding or lack of experience could wipe out the threat of a new player leading to our bull case TP of S$3.10.




Sachin MITTAL DBS Vickers | http://www.dbsvickers.com/ 2016-09-22
DBS Vickers SGX Stock Analyst Report FULLY VALUED Downgrade HOLD 2.15 Down 2.850



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