M1 (M1 SP) - UOB Kay Hian 2017-02-24: Making Steady Progress In Fixed Network Services

M1 (M1 SP) - UOB Kay Hian 2017-02-24: Making Steady Progress In Fixed Network Services M1 LIMITED B2F.SI

M1 (M1 SP) - Making Steady Progress In Fixed Network Services

  • Network sharing between M1 and StarHub encompasses existing 3G and 4G networks in addition to a new shared 5G network. Thus, negotiations could be more protracted and a definitive deal could only be struck by 4Q17. 
  • M1 has made good progress in securing contracts from government ministries for leased circuits, WiFi, managed services and analytics. It has also expanded into IoT. 
  • We raise earnings by +1.1%/+2.6% for 2018/2019. 
  • Maintain BUY with a higher target price of S$2.52.



WHAT’S NEW


Collaborating on intensified network sharing. 

  • Management re-iterated that the intent stated in its MOU with StarHub was to share both radio access (base stations) and backhaul transmission network. Both companies need to open their books and also iron out the mechanism and framework for sharing. 
  • The sharing involves both existing 3G and 4G networks and also a new shared 5G network to be rolled out over the next 18-24 months. Management anticipates a definitive deal could be signed in 4Q17.

Partnership currently confined to mobile. 

  • The collaboration is unlikely to include fibre broadband and enterprise connectivity, which rides on network infrastructure provided by NGNBN. 
  • Management would like to retain its own Operating Company (OpCo), which could be calibrated to provide differentiating features to M1’s fibre broadband and enterprise connectivity service offerings.

Prepared for upcoming spectrum auction. 

  • We expect the upcoming general spectrum auction to be conducted in March (spectrum rights commence on 1 Apr 17). We believe all four telcos, including TPG, have submitted their expression of interest to participate.
  • The spectrum caps imposed on TPG are: a) 40MHz for 700MHz, b) 20MHz for 900MHz and c) a total of 75MHz (global cap for both new entrant spectrum auction and general spectrum auction). This means TPG could bid for another 15MHz of spectrum from the 700MHz and 2500MHz frequency bands.
  • We postulate that the combined demand for spectrum from both M1 and StarHub would be reduced given that both companies are working on sharing of network infrastructure.
  • However, management cautioned that each has to bid based on their independent requirements as the network sharing deal has not been concluded yet.

Fending off competition from TPG. 

  • Management suspect that incumbent telcos may not make further price cuts as pricing for SIM-only packages are already very attractive.
  • M1 would offer “sweeteners” to its loyal customers to steal the thunder from TPG’s launch. It also differentiates its service offering through data passport. M1 has also launched Upsized Data Plus to match Singtel’s DataX3.

Expansion into digital solutions. 

  • M1 is an approved vendor and has secured a few contracts from government ministries involving leased circuits, WiFi, managed services and analytics. These new projects incur capex upfront but require a gestation period of 3-4 months before making revenue contributions in 2H17.
  • M1 should complete its nation-wide narrowband Internet-of-Things (NB IoT) network by 3Q17. The NB IoT network delivers enhanced performance for machine-to-machine (M2M) communications. Management envisage contributions from enterprise customers for smart metering (electricity and water) and fleet management (taxis, buses and delivery trucks) applications starting 4Q17.


STOCK IMPACT


An arranged marriage. 

  • The chances of M1 and StarHub sharing a common radio access and backhaul transmission network are high, as both companies share the same set of equipment vendors, namely Huawei and Nokia. With the mobile landscape getting more competitive, M1 and StarHub are forced to collaborate.

Unfazed by heightened uncertainties. 

  • The entry of TPG has introduced heightened uncertainties. However, we maintain our positive view on M1 as its share price has collapsed 52% from its peak at S$3.99 to recent trough at S$1.915 and dividend yield has improved to 5.9%. M1 also benefits more from network sharing as mobile accounted for a larger 78.8% of its service revenue in 4Q16.


EARNINGS REVISION/RISK

  • We raised our projection for revenue contributions from fixed network services by +10%/+11% for 2018/2019, which translates to earnings revision of +1.1%/+2.6%.


VALUATION/RECOMMENDATION

  • Maintain BUY. We increase our target price for M1 slightly to S$2.52 based on DCF (COE: 7.5%, terminal growth: 1.5%).


SHARE PRICE CATALYST

  • M1’s dividend yield has improved to 5.9% after the recent steep correction.
  • Savings in capex from sharing of mobile infrastructure with StarHub.




Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-02-24
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 2.52 Up 2.480



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