M1 - DBS Research 2017-01-25: Service revenue contraction to continue

M1 - DBS Vickers 2017-01-25: Service revenue contraction to continue M1 LIMITED B2F.SI

M1 - Service revenue contraction to continue

  • 4Q16 net profit of S$ 31.8m (-27 y-o-y, -8% q-o-q) was below expectations due to lower mobile revenue and higher costs.
  • Higher accrued handset revenues to have an impact on future revenues.
  • Maintain HOLD with a revised TP of S$ 1.97.



We project new entrant TPG to gain 8.5% mobile revenue share by 2022. 

  • With an annual EBITDA of A$775m and FY16 (July year-end) net debt-to-EBITDA of 1.6x, TPG has sufficient capital to roll out a nationwide mobile network. Hence, we believe the impact on the incumbents from the entry of TPG to be acute, and project TPG to secure 8.5% revenue share by 2022. 
  • In our bull-case and bear case scenarios for M1, we project TPG to secure 6% and 10% revenue share respectively.


4Q16 net profit 10% below expectations. 

  • 4Q16 net profit of S$ 31.8m (-27.1% y-o-y, 7.6% q-o-q) was ~10% below expectations due to lower than expected mobile service revenue and increased cost base. 
  • Contraction of voice, roaming revenues and higher data allowances affected service revenue. 
  • Postpaid acquisition costs rose 23% q-o-q and 10% y-o-y to S$438 per customer while facilities and other costs also rose significantly.


M1 most impacted from the entry of a fourth operator. 

  • We believe the potential entry of a new player will be most felt by M1 due to its higher exposure to mobile revenue and a more price-sensitive subscriber base. 
  • We project M1’s mobile revenue share to contract from 18% at present to 14% in 2022, down from 15% in our previous estimates. 
  • Further, we expect M1’s earnings to contract by 38% by 2022 from 2015 levels, compared to the 31% drop we previously expected.


Valuation

  • Maintain HOLD with revised TP. Our revised DCF-based (WACC 7.1%, terminal growth 0%) TP is S$1.97 as we reduce FY17F/18F profit estimates. The counter has ~9% downside risk while offering a 5% yield. 
  • Our bull-case and bear case TPs for M1 are S$2.23 and S$1.85 assuming 6% and 10% revenue share for TPG by 2022 respectively 


Key Risks to Our View: Limited uptake of TPG’s services. 

  • As an inexperienced operator, TPG could struggle to deploy and maintain a network that could challenge the network quality of M1. Under this bull-case scenario, our TP is S$2.35 for M1.




Sachin MITTAL DBS Vickers | http://www.dbsvickers.com/ 2017-01-25
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 1.97 Down 2.090



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