M1 Limited - 4QFY16 Results Flash
- A weak 4Q16 core earnings was in line with our estimates.
- We maintain our earnings estimates and unchanged DCF based TP of SGD2.05 (WACC : 8.5%, TG: 1.5%). Reiterate NEUTRAL rating.
- 4Q16 core earnings fell 28% YoY to SGD31.6m, bringing FY16 core earnings to SGD149.8m (-16% YoY). Full year core earnings accounted for 98% of our forecast and 96% of consensus estimates.
- Core earnings were the lowest/weakest since FY12.
- Service revenue contracted 4% YoY in 4Q16 and 2% YTD with the key drag coming from the extended weakness in mobile revenue (-4.1% YoY) as M1 continues to be impacted by weak roaming and IDD revenues.
- Higher traffic cost (+12% QoQ) and seasonal bump in handset cost (+85% QoQ) crimped EBITDA, which fell 18.2% sequentially. This led to the 2%-pts drop in 4Q16 EBITDA margin to 36% (FY16: 38.7%).
- A final DPS of 5.9cent/share has been proposed with FY16 DPS of 12.9cent/share reflecting a 78% payout.
- Mobile service revenue has contracted for the past seven quarters due to over-the-top content (OTT) cannibalisation, acute roaming revenue pressure and data promotions (roaming revenue makes up 8-10% of M1’s mobile revenue). The structural pressure on roaming revenue is a widespread industry phenomenon.
- Prepaid revenue contraction accelerated to 15.2% YoY in 4Q16 from 10.3% in 3Q16 as ARPU fell to SGD11.50 (4QFY15: SGD14). The prepaid segment makes up less than a fifth of M1’s overall mobile revenue.
- Post-paid revenue fell 5% YoY in 4Q16 but gained 3.2% QoQ, supported by the data- upsized packages. M1 said it witnessed little down-trading (from the data-upsized promotions) with subscribers maintaining their ARPU or taking up higher ARPU plans. Post-paid ARPU (gross) inched higher QoQ to SGD57.1 from SGD56.5.
- The bright spot continues to come from its fixed services (enterprise) segment, up 10% QoQ and 21.4% for FY16. We expect fixed services to remain the key growth driver for M1 going forward, underpinned by its focus on smart nation projects, Internet of things (IoT) services and cloud solutions.
- Average data consumption on its network has risen to 3.6GB/mth from 3.4GB/mth in 3Q16 and 3.3GB/mth in 4Q15.
- Capex is guided at SGD170m for FY17 (FY16: SGD141m) as M1 is investing for the future with greater fiber investments to capitalise on the growth in the enterprise segment.
- The MOU on infrastructure sharing with StarHub (STH SP, NEUTRAL, TP: SGD2.82) could potentially lead to 20-30% opex/capex savings which we have yet to factor into our forecast. There were very little details shared as both parties are assessing the requirements.
- Management has maintained its dividend payout guidance of at least 80% of core earnings.
- Our forecast assumes a 19%/28% decline in core EBITDA/earnings between FY17-FY19 due to the threat posed by the new/fourth mobile licensee, TPG Telecom (TPG).
- M1 trades at -1 SD to its 5-year historical EV/EBITDA mean of 8.5x with share price supported by prospective dividend yields of over 7%. Prefer Singtel (ST SP, NEUTRAL, TP: SGD4.00) given its smaller exposure to the domestic mobile business.
- Key risks to our forecast and TP are:
- stronger than expected competition from TPG,
- higher than expected capex and
- further dilution in data yields.