M1 (M1 SP) - UOB Kay Hian 2017-01-25: 4Q16 Committed To A Win-Win Outcome

M1 (M1 SP) - UOB Kay Hian 2017-01-25: 4Q16 Committed To A Win-Win Outcome M1 LIMITED B2F.SI

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.


RESULTS

  • 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.


STOCK IMPACT


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.


EARNINGS REVISION/RISK

  • 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.


VALUATION/RECOMMENDATION

  • 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.




Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-01-25
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 2.48 Down 2.500



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