M1 - Maybank Kim Eng 2016-10-19: Pressures mounting

M1 (M1 SP) - Maybank Kim Eng 2016-10-19: Pressures mounting M1 LIMITED B2F.SI

M1 (M1 SP) - Pressures mounting


Already bad, even before the worst; maintain SELL 

  • Maintain SELL on M1. 3Q16 results were below expectations. 
  • We further lower already-reduced FY16-18E by 6-14% and DCF-based TP by 7% from SGD2.04 to SGD1.90. 
  • The biggest concern was the much sharper fall in postpaid revenue of 6% YoY vs 1-2% in the past few quarters, even before new rivals have a chance to make an appearance. 
  • As it stands, M1 already has the most to lose due to its purely Singapore AND mostly mobile focus (mobile accounts for 80-82% of total service revenue).


Below expectations in quantum but not in trend 

  • 3Q/9M16 NP fell 23%/13% YoY and accounts for 70% of FY16E, which already built in a 6% fall (we revise down by a further 6%, post-results).
  • Decline in postpaid revenue accelerated to 6% YoY from low single-digit previously, which management attributed to lower roaming (which has not found a floor yet) and more worryingly, a decline in adhoc excess usage revenue, which was not compensated for by recurring revenue.


Many uncertainties looming 

  • IMDA’s decision on which of the three applicants will be qualified to bid in the NESA (New Entrant Spectrum Auction) has been delayed a month till end-Oct. Our bets are on MyRepublic and TPG (TPM AU; Not-rated).
  • Spectrum prices, if chased up by the new entrant/s, could stretch M1’s balance sheet further. Its net debt/EBITDA of 1.2x is already the highest in the sector. While M1 maintains its 80% dividend payout guidance, DPS is expected to dip along with falling profits.


Still stands to lose the most 

  • M1 stands to lose the most from a new competitor due to its purely Singapore AND mostly mobile focus (mobile accounts for 80-82% of total service revenue, with the most vulnerable prepaid segment comprising c.40% of its subscriber mix). 
  • The winner is obliged to roll out nationwide outdoor coverage by 30 Sep 2018, road tunnels and in-building by 30 Sep 2019, and underground MRT stations and lines by 30 Sep 2021.


Swing Factors


Upside

  • No new competitor to take up a new mobile operator licence. The three incumbents keep their spectrum allocations, including bands reserved for fourth telco.
  • Merger with StarHub or formulation of ways to differentiate itself permanently, easing marginalisation concerns.

Downside

  • M1’s spectrum allocation is reduced if fourth telco emerges and takes up its full reserve.
  • Unable to maintain 80% payouts if it needs to pay more for spectrum or network investments.
  • Subscriber churns if users decide they need more than mobile and broadband. Netflix’s entry could tip the scale against M1 due to likely tie-ups with Singtel and StarHub.




Gregory Yap Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-10-19
Maybank Kim Eng SGX Stock Analyst Report SELL Maintain SELL 1.90 Down 2.040



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