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.