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.
- 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.