M1 Limited - 1Q17 No reason to get excited
- 1Q17 results in-line. Core EPS at 25%/25% of our/consensus FY17 forecasts.
- Mobile service revenue fell by 3.5% yoy (-0.5% qoq) in 1Q17. Fixed services revenue continued to shine, up 22.4% yoy (+10.3% qoq).
- EBITDA margin fell by 3.1% pts yoy (+2.7% pts qoq) in 1Q17 due to higher costs.
- We cut FY19F core EPS by 3.4% to factor in the high price of the 700MHz licence.
- Maintain Reduce with a 6% lower DCF-based target price of S$1.70. A potential derating catalyst is the 11.9% 3-year CAGR decline in core EPS in FY17F-19F.
1Q17 results were in line with expectations
- EBITDA fell by a milder 8.6% yoy in 1Q17 due to lower service revenue and higher opex. 1Q17 core EPS declined by a steeper 19.5% yoy due to higher depreciation, net interest cost and effective tax rate.
- Qoq, EBITDA/core EPS rose 7.8%/23.9%, mainly due to lower costs, some of which are seasonal (e.g. A&P, handset subsidies).
- Overall, 1Q17 core EPS was in line, coming in at 24.7%/24.7% of our/consensus FY17 forecasts. As usual, no dividends were declared in 1Q17.
Mobile revenue fell yoy; fixed services offer some hope
- Mobile service revenue (78% of total) fell by 3.5% yoy (-0.5% qoq) in 1Q17.
- Postpaid revenue fell by 1.7% yoy (flat qoq) due to a greater take-up of sim-only plans and lower roaming, while prepaid revenue dropped 18.2% yoy (-5.6% qoq) on lower voice traffic, despite an expanding subs base for both segments.
- Fixed services revenue (15% of total) grew by a stronger 22.4% yoy (+10.3% qoq) in 1Q17 on a higher customer base and larger contributions from government projects that were secured at end-2016.
EBITDA margin down 3% pts yoy
- EBITDA margin on service revenue was down 3.1% pts yoy to 37.6% in 1Q17. This was mainly due to higher wholesale, staff and other costs on slightly lower service revenue.
- Qoq, margin was up 2.7% pts due to seasonally lower A&P and handset subsidies, while facilities and other cost of sales also fell.
- Under EBITDA, depreciation and amortisation rose by 4.6% yoy (-5.1% qoq) in 1Q17 on a higher fixed asset base.
- Net debt/EBITDA decreased to 1.2x (4Q16: 1.4x) due to higher EBITDA (last quarter annualised).
FY19F core EPS cut by 3% due to high 700MHz spectrum price
- FY17F-18F core EPS is raised by 1.6%-2.5% as we have:
- removed the cash outflow and amortisation that we had previously factored in for the 2500MHz spectrum, as M1 did not win any in the recent general spectrum auction and
- lowered FY17F capex to S$150m from S$170m, in line with M1’s latest guidance.
- However, we cut FY19F core EPS by 3.4% due to higher amortisation and interest cost, arising from the high price of S$188m for the 700MHz (2x10MHz) spectrum, which is likely to be paid in 2H18.
Maintain Reduce with a 6% lower DCF-based target price of S$1.70
- Factoring in the higher-than-expected spectrum payments, we lower our DCF-based target price by 5.6% to S$1.70 (WACC: 7.1%) and maintain our Reduce rating.
- M1’s 13.9x FY17F EV/OpFCF is at a 23% discount to ASEAN telcos, which we think is justified given its future earnings risk.
- A good entry point would be below S$1.38 (bear case) and exit point above S$2.01 (bull case).
- Upside/downside risks are better/worse-than-expected impact of TPG’s entry.