M1 (M1 SP) - 4Q16 Committed To A Win-Win Outcome
- M1’s 4Q16 results were in line with expectations.
- We believe the chances of M1 and StarHub sharing a common radio access network and backhaul transmission for 5G are high, as both companies share the same set of equipment vendors, namely Huawei and Nokia.
- With the mobile landscape getting more competitive, M1 and StarHub are forced to collaborate.
- Re-iterate BUY with target price at S$2.48.
- M1 reported net profit of S$31.8m for 4Q16, in line with our forecast of S$31.1m.
Mobile: Soft sequential bounce.
- M1 added a respectable 15k post-paid (3Q16: 10k) and 10k pre-paid (3Q16: 4k) subscribers in 4Q16.
- Post-paid ARPU was still under pressure at S$57.10 (+1.1% qoq, -7.3% yoy) due to lower contribution from roaming.
- Prepaid ARPU receded 4.2% qoq due to lower usage for voice.
- Data traffic increased by 9.1% yoy to 3.6GB/user. Data contributed to 54.8% of mobile service revenue (4Q15: 51.2%).
Fixed network services: Steady expansion.
- M1 added 8k fibre broadband subscribers (3Q16: 7k). ARPU softened by 5.7% qoq to S$43.10 due to promotions during IT shows.
- It has a balanced mix of residential and corporate customers, each accounting for about half of revenue. Fixed network services accounted for 13.5% of service revenue (4Q15: 11.8%).
No visible rationalisation of operating expenses.
- EBITDA margin contracted by 2ppt qoq to 35.8%. Operating expenses remained elevated. Staff costs increased 3.5% yoy.
- Facilities expenses grew 15.4% yoy due to higher maintenance.
- Depreciation rose 3.8% yoy, dragging net profit down by a hefty 27.1% yoy.
A conservative payout.
- M1 has declared final dividend of 5.9 S cents, which is lower than its interim dividend of 7.0 S cents. This reflects the poorer performance in 2H16.
- Dividend payout ratio was 80.7% for 2016, in line with its usual policy.
Guidance for 2017.
- Management did not provide guidance on revenue or earnings as the outlook is uncertain.
- Guidance for capex of S$170m includes a one-off investment of S$30m for future businesses, including NB-IoT and data analytics. Capex should normalise back to S$140m in 2018.
Expansion into IT solutions.
- M1 would 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.
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).
Collaborating on network sharing.
- A shared network provides better coverage at a lower cost. Management is committed to work towards a win-win outcome for both M1 and StarHub.
- Management felt that it is too early to estimate the potential costs savings. They indicated that it takes 18-24 months to roll out a new mobile network.
Successful 5G trial.
- M1 and Huawei have achieved 5G transmission speed of 35Gbps using millimetre wave technology over the 73GHz frequency band.
- With 5G, consumers would be able to download 1080p movies in seconds. 5G is able to support a massive number of low latency connections, which could power the next generation of virtual/augmented reality and IoT applications.
- We kept our 2017 net profit forecast relatively unchanged.
- We cut our net profit forecast for 2018 marginally by 1.3% due to higher depreciation and weakness in pre-paid ARPU.
- We have lowered our target price for M1 slightly to S$2.48 based on DCF (COE: 7.5%, terminal growth: 1.5%).
SHARE PRICE CATALYST
- M1’s dividend yield has improved to 5.6% after recent steep correction.
- Savings in capex from sharing of mobile infrastructure with StarHub.