M1 - DBS Research 2016-10-19: Sharp decline in service revenue

M1 - DBS Vickers 2016-10-19: Sharp decline in service revenue M1 LIMITED B2F.SI

M1 - Sharp decline in service revenue

  • Disappointing profit as topline hit by cheaper upsized data plans.
  • M1 lowers FY16F net profit guidance; we cut FY16F/17F earnings by 8%/9%.
  • Maintain FULLY VALUED with lower TP of S$1.97.


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

  • We believe the potential entry 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 24% from 2015 levels with a 31% drop in earnings by 2022.

2Q16 net profit of S$ 34.4m (-23% y-o-y, -16% q-o-q) was 15% below our expectations. 

  • Mobile service revenue fell 5% qo-q unexpectedly as many customers adopted cheaper upsized data plans instead of paying S$10 for each additional GB. 
  • Decline in mobile roaming and adoption of SIM only plans were other factors that led to the decline.  
  • Accrued handset revenue decreased ~S$7m in 3Q16 versus 2Q16 due to lower iPhone sales. This resulted in S$7m adverse impact on earnings which is likely to continue as M1 still has S$67m in accrued handset revenue. 
  • M1 downgraded its official guidance from single-digit decline in net profits to ~12% decline in FY16.

An aggressive fourth 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 7% in 2022 versus 2015. 
  • A well-funded player could capture up to 7% revenue share by 2022 on our estimates.


Valuation

  • Recommend FULLY VALUED. 
  • Our revised DCF-based (WACC 7.1%, terminal growth 0%) TP is S$1.97 as we cut our FY16F/19F earnings by 8%/9%. 
  • In the face of potential earnings decline, forward PE multiple could shrink to 12x (below -2SD) versus 14-15x 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$2.85.




Sachin MITTAL DBS Vickers | http://www.dbsvickers.com/ 2016-10-19
DBS Vickers SGX Stock Analyst Report FULLY VALUED Maintain FULLY VALUED 1.97 Same 2.150



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