M1 - UOB Kay Hian 2016-10-19: 3Q16 ~ Another Rude Awakening

M1 (M1 SP) - UOB Kay Hian 2016-10-19: 3Q16 ~ Another Rude Awakening M1 LIMITED B2F.SI

M1 (M1 SP) - 3Q16 ~ Another Rude Awakening

  • The steep fall in post-paid ARPU and post-paid revenue is likely to give investors a negative surprise. We also did not see any visible rationalisation of expenses.
  • Prospects for an operational turnaround or a reversal to positive news flow are dim.
  • Maintain SELL. We have further lowered our target price to S$1.76.


RESULTS

  • M1’s 3Q16 net profit of S$34.4m was significantly below our forecast of S$40.6m.

Steep fall in post-paid revenue. 

  • M1 experienced a steep fall in post-paid ARPU of 7.7% yoy to S$56.50. Management attributed the decline to a reduction in excess charges for data and lower contribution from roaming. Only 17% of subscribers exceeded their data bundles (2Q16: 21%). Average usage of data increased by only 3% yoy to 3.4GB.
  • Customers have become more cost conscious due to the dismal outlook for the economy.
  • In addition, we see increased competition in data with all three incumbents offering attractive upsize options.
  • M1 added a healthy 10,000 post-paid subscribers during the quarter. Management disclosed that SIM-only plans accounted for about 30% of new sign ups (gross additions).

Fixed services still relatively small. 

  • M1 added 7,000 fibre broadband subscribers.
  • ARPU for fibre broadband inched higher by 1.3% qoq to S$45.70. Revenue from fixed services increased 25% yoy but accounted for only 13.7% of service revenue (mobile: 78.7%).

No visible rationalisation of operating expenses. 

  • Operating expenses increased by 3% qoq. EBITDA margin contracted by 2.5ppt qoq to 37.8%.
  • Depreciation & amortisation rose 2.6% qoq. Net profit declined by a hefty 23.4% yoy.
  • Entry of fourth telco would have negative impact on financial leverage. At the moment, M1 has preserved its healthy balance sheet with net debt/EBITDA at 1.2x.


STOCK IMPACT


Downgraded guidance again. 

  • Management expects full-year earnings to decline by about 12% (previous guidance: single-digit decline), similar to the magnitude of decline for 9M16. Guidance for capex was maintained at S$140m.

Expansion into IT solutions. 

  • M1 will be investing in new technologies and capabilities to build a portfolio of IT solutions for SMEs and enterprise customers. These efforts incur expenditure upfront and would have a dilutive impact on EBITDA margin. It would take a couple of years before M1 achieves scale in service adoption and the new business makes meaningful contribution to revenue.
  • M1 has launched a suite of enterprise-grade cyber security solutions. Its offerings include next-generation security platform, including firewall and threat intelligence cloud, from Palo Alto Networks, network monitoring service from Proficio and vulnerability scanning and assessment service from Red Sentry.

Expansion into IoT. 

  • M1 has entered into a strategic partnership with Nokia to roll out a nation-wide narrowband Internet of Things (NB IoT) network by 1H17. The NB IoT network is designed to deliver enhanced performance for machine-to-machine (M2M) communications. 
  • Management envisage applications in smart metering (electricity and water) and Smart Nation initiatives (mess of sensors).


EARNINGS REVISION/RISK

  • We cut our net profit forecast for 2016 by 6% and for 2017 by 13% to factor in the secular decline in excess charges for data and roaming.


VALUATION/RECOMMENDATION

  • We have lowered our target price for M1 to S$1.76 based on DCF (COE: 7.5%, terminal growth: 1.5%).


SHARE PRICE CATALYST

  • M1’s dividend yield has moderated to 5.4%.
  • Competition from impending entry of a fourth telco.




Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-10-19
UOB Kay Hian SGX Stock Analyst Report SELL Maintain SELL 1.76 Down 2.000



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