M1 Limited - Down and still out
- New promos to put some pressure on mobile revenue in FY16F-17F. New player to drive mobile revenue down 11% between FY17F and FY20F.
- Healthy fixed services growth to help partially buffer weaker mobile revenue.
- EBITDA to stay flattish in FY16F-17F and could decline by 20% in FY17F-20F.
- Payout ratio likely to stay at 80% due to high capex and spectrum payments.
- Maintain Hold and DCF-based target price of S$2.10.
Soft mobile revenue before bigger decline in 2018
- We expect M1’s mobile service revenue to be slightly under pressure in FY16F (- 4.4%) and FY17F (+0.7%) due to the recent launch of lower-priced SIM-only plans and upsized data promos. Thereafter, we expect mobile service revenue to fall by 11.2% between 2017F and 2020F as competition intensifies once the fourth mobile player launches its service in early-2018.
Fixed services growth will help to provide some cushion
- We expect fixed services revenue to record a healthy 3-year CAGR of 17.7% in FY16F-18F, driven by new government contracts, gradually rising corporate market share (only c.5% now) and growth in residential fibre subscribers.
- Growth in fixed services, which formed 10.4% of FY15’s total service revenue, will help to cushion revenue in FY16F/17F (-2.5%/+1.6%) and rein in the decline to 5.4% between FY17F and FY20F, in our view.
EBITDA to stay flattish in FY16F-17F; 19% decline FY17F-20F
- We forecast EBITDA to decline by 7.6% in FY16F and to recover by 4.0% yoy in FY17F due to a reduction in handset subsidies. Driven by a substantial drop in revenue, EBITDA will fall by 20.1% in FY17F-20F, with the EBITDA margin falling to a low of 33.5% in FY20F, based on our projection.
- In our bear/bull case, EBITDA could fall by 38%/7% in the same three-year period.
Capex to stay high for another two years
- We believe capex is likely to stay high at c.S$130m-140m p.a. (capex/sales: 16.0- 17.5%) in FY16F-17F before easing to S$120m p.a. over the long term. About S$100m will likely be spent on mobile network maintenance/upgrades while the remaining S$30m-40m will be largely for fibre investments, i.e. to connect more buildings and for mobile backhaul.
Payout ratio increase and special dividends unlikely
- We do not expect M1 to raise its payout ratio (FY15: 80%) or pay special dividends in the next two years. Due to high capex and spectrum payments, we forecast net debt/EBITDA at 1.3x/1.2x/1.2x by end-FY16F/17F/18F, which is within its optimal capital structure range of 1.0x to 1.5x, in our view.
Maintain Hold and DCF-based target price of S$2.10
- We maintain our Hold rating and DCF-based target price of S$2.10 (WACC: 7.1%).
- M1’s 12.7x FY17F EV/OpFCF is at a 9.3% discount to the ASEAN telco average.
- Dividend yield of 6.7%/7.0% in FY16/17F will fall to 5.7% in FY18 due to earnings decline, impacted by more intense competition from the fourth mobile player.
- Upside/ downside risks are better-/worse-than-expected impact from the entry of the fourth mobile player.