M1 - 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.

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

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).

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%).

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.

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.

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.

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).

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.

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

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