M1 Ltd - Resetting Expectations
- We cut FY18/19 core earnings forecasts further to factor in higher risks from a potentially disruptive but likely rational new entrant, TPG Telecom (TPG).
- M1 exhibited the largest revenue/EBITDA share decline over the past two years and has the biggest exposure to the domestic market with a lack of bundling opportunity to mitigate subscriber churn.
- Our DCF based TP is lowered to SGD2.05 (from SGD2.55, 5% upside).
- Maintain NEUTRAL as the stock’s risk-reward is more balanced now following the sharp sell-down with a 7% prospective dividend yield.
- M1 is highly susceptible to revenue and EBITDA pressure from the budding fourth mobile entrant, TPG Telecom (TPG) as the mobile segment makes up 80% and an estimated 70% of the group’s 9MFY16 service revenue and EBITDA respectively.
- M1’s bigger exposure to the more price sensitive segment of the market could see revenue pressure intensify from FY18 as TPG introduces attractively priced and innovative plans in the market.
- Already, the on-going competition in the market (from Singtel and StarHub) and structural roaming revenue pressure in the industry have contributed to above industry average decline in mobile revenue of 7% YoY in 3Q16 (9M16: -4% YoY) as blended ARPU plunged 10% in 3Q16 (9MFY16: -7% YoY).
- M1 posted the largest decline in revenue and EBITDA share in the industry over the past two years of 1ppts and 2.1 ppts respectively.
- We cut our FY18/19 core earnings forecasts by a further 10.1%/16.8% after building in stronger ARPU dilution of 20-23% (vs. 15-20% previously) and margin pressure from greater retention activities.
- M1 had earlier downgraded FY16 earnings guidance (the second consecutive quarter of downgrade) post the release of its 3Q16 results with full year earnings set to contract by ‘low to mid-teens’ vs. ‘single digit decline’ previously.
- We note M1’s focus on smart nation projects, cloud computing and internet of things (IoT) would mitigate pressure on revenue and earnings in the medium to longer-term.
Still resonating M&As.
- The telco has been the subject of M&A talks in the market over the past year. This stemmed largely from potential corporate exercises involving its two major shareholders – Keppel Telecoms and Axiata Group (AXIATA MK, NEUTRAL, TP: MYR4.70) which respectively holds 19.5% and 28.2% stake in the company. Axiata was previously reported to be keen on upping its stake in M1 but management had denied talks of any negotiations.
Share price at multi-year lows.
- Our DCF based TP (WACC: 8.5%, TG: 1.5%) is lowered to SGD2.05 (from SGD2.55) following the earnings downgrade.
- Following the sharp 28% sell-down on the stock YTD, M1 trades at -1 SD to its 5-year historical EV/EBITDA mean of 8.5x with share price supported by prospective dividend yields of over 7%.
- Key risks to our forecast and TP are:
- Stronger than expected competition from TPG;
- Higher than expected capex and;
- Further dilution in data yields.