M1 Limited - CIMB Research 2017-01-25: 4Q16 Underwhelming performance

M1 Limited - CIMB Research 2017-01-25: 4Q16 Underwhelming performance M1 LIMITED B2F.SI

M1 Limited - 4Q16 Underwhelming performance

  • FY16 core EPS fell by a steep 17.9% yoy. Results were below expectations due to higher-than-expected opex, depreciation and effective tax rate.
  • Mobile service revenue continued to decline yoy in 4Q16 due to lower postpaid roaming revenue. Fixed services revenue was the bright spot, up 10.1% yoy.
  • EBITDA margin fell for a third consecutive quarter in 4Q16, down 5.9% pts yoy due to softer mobile service revenue and higher opex.
  • We cut FY17-18F core EPS by 7-10% and factor in a 21% capex jump in FY17F.
  • Downgrade to Reduce on 5% lower target price of S$1.80. A potential de-rating catalyst is the 10.9% 3-year CAGR decline in core EPS in FY17F-19F.


4Q16 below expectations; 80% dividend payout 

  • EBITDA tumbled 17.7% yoy (-3.7% qoq) in 4Q16 due to lower mobile revenue and higher opex. 
  • Core EPS was down by a steeper 36.5% yoy (-19.3% qoq) due to higher depreciation and effective tax rate. 
  • For FY16, core EPS fell 17.9% yoy. This was below expectations, coming in 6.9%/7.4% lower vs. our/consensus forecasts. The key variance was higher-than-expected opex, depreciation and effective tax rate. 
  • Final DPS was 5.9 Scts, bringing FY16 DPS to 12.9 Scts, based on an 80% payout ratio.


Mobile service revenue continued to decline yoy in 4Q16 

  • Mobile service revenue (64% of total) continued to decline by 5.9% yoy (+2.1% qoq) in 4Q16, largely due to a 4.8% yoy decline (+3.2% yoy) in postpaid as roaming usage fell.
  • This was partially buffered by growing data revenues, as subs exceeding their data bundles grew to 28% (4Q15: 25%, 3Q16: 26%). Meanwhile, fixed services revenue (9% of total) grew by a decent 10.1% yoy but was largely flat qoq. Despite sustained high net adds (8k qoq to 160k subs), ARPU fell sharply 5.7% qoq due to year-end promos.


Further decline in EBITDA margin 

  • EBITDA margin on service revenue fell for a third consecutive quarter, down 5.9% pts yoy (-2.1% pts qoq) to 35.0% in 4Q16, mainly due to higher traffic, network maintenance and project accrual costs. 
  • Under EBITDA, depreciation and amortisation rose 3.4% yoy (+4.7% qoq) in 4Q16 on a higher fixed asset base. 
  • Net debt/EBITDA increased to 1.4x (3Q16: 1.3x) due to lower EBITDA (last quarter annualised).


FY17-18F core EPS cut by 7-10%; FY17F capex to jump 21% 

  • We cut our FY17-18F core EPS by 7.2-9.6%, which factors in lower EBITDA margin, plus higher depreciation and interest expense due to a 21% jump in capex to S$170m (in line with M1’s guidance). 
  • Included in the higher FY17F capex are one-off investments for NB-IOT network upgrades, data analytics and ICT-related projects, which we assume will normalise to S$140m in FY18. 
  • From FY19 onwards, we factor in 20% capex savings from M1’s network sharing with StarHub.


Downgrade to Reduce with 5% lower target price of S$1.80 

  • We downgrade M1 from Hold to Reduce. 
  • DCF-based target price cut by 5.3% to S$1.80 (WACC: 7.1%), post-earnings revision and after factoring in 20% capex savings from network sharing with StarHub (FY19 onwards). 
  • M1’s 14.8x FY17F EV/OpFCF is roughly in line with ASEAN telcos, which we think is unjustified given future earnings risk. A good entry point would be below S$1.48 (bear case) and exit point above S$2.11 (bull case). 
  • Upside/downside risks are better/worse-than-expected impact of TPG’s entry.




FOONG Choong Chen CFA CIMB Research | http://research.itradecimb.com/ 2017-01-25
CIMB Research SGX Stock Analyst Report REDUCE Downgrade HOLD 1.80 Down 1.900



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