M1 (M1 SP) - Maybank Kim Eng 2017-04-19: More Weak Results Ahead

M1 (M1 SP) - Maybank Kim Eng 2017-04-19: More Weak Results Ahead M1 LIMITED B2F.SI

M1 (M1 SP) - More Weak Results Ahead


Maintain SELL post in-line 1Q17 results 

  • 1Q17 net profit (adjusted for one-off gain from fixed asset sale) fell 20% YoY to SGD34m, its weakest in six quarters. 
  • Mobile revenue and margins were weak as ARPUs were sacrificed for subscriber gains. Management would not commit on either guidance for profits and dividends beyond FY17 or a maximum gearing that it is comfortable with. 
  • The risk, in our view, is on the downside. The wild card lies in the on-going shareholder strategic reviews but our current position is to sell into any strength.
  • DCF-based TP maintained at SGD1.75 (WACC 5.2%, LTG 0%).


1Q17 in line but weak 

  • Even before competition sets in, this is already M1’s sixth consecutive quarter of weaker earnings. 1Q17 net profit fell 15% YoY to SGD36.3m.
  • Excluding a SGD2.4m gain from fixed asset disposal, net profit fell 20% YoY to SGD34m or 24% of our full-year forecast. 
  • Mobile revenue fell 3.6% YoY as M1 sacrificed ARPUs for subscriber gains. 
  • EBITDA margin, below 40% for three quarters now, rose QoQ but still has to contend with two big handset launches this year (Samsung S8 last month, iPhone 8 in Sep).


Circumspect on guidance 

  • M1 did not guide on full-year profits. 
  • Also, its 80% dividend payout is valid for FY17 only, not surprisingly as it will only need to pay SGD20m for spectrum this year while another SGD188m will come due after FY17. We have assumed a 50/50 split in FY18/19. 
  • Management would also not commit on the maximum gearing it is comfortable with. We are assuming 2x net debt/EBITDA but that still implies it will need to lower FY18/19 dividend payouts to 50% to keep gearing below that.


Ownership changes the wild card 

  • All three of M1’s major shareholders are conducting strategic reviews of their stakes. 
  • In our view, the process will be hampered by the imminent shakeup of the industry, which is well-known by now, and the sale value will have to reflect the challenges ahead. The possibility of a wild card emerging is always possible, but our current position would be to sell the stock into any strength.


Swing Factors


Upside

  • Formulation of ways to differentiate itself permanently, easing marginalisation concerns.
  • Major shareholders’ strategic reviews lead to a positive change in ownership profile.

Downside

  • Unable to maintain 80% payouts if it needs to pay more for spectrum or network investments.
  • Subscriber churns rise as users decide they need more than mobile and broadband.




Gregory Yap Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-04-19
Maybank Kim Eng SGX Stock Analyst Report SELL Maintain SELL 1.750 Same 1.750



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