CIMB Research 2015-07-09: M1 - Most at risk from fourth MNO. Maintain HOLD, TP Cut.

Most at risk from fourth MNO 

  • M1 stands to lose the most from new competition given its largely Singapore mobile focus and lesser ability to bundle quad-play services. 
  • While its share price has fallen substantially in the past 3 months, M1’s valuation and dividend yields have not yet become attractive enough. 
  • We keep our core EPS for FY15-16 unchanged but cut FY17 by 4.0% to factor in the initial impact from the fourth MNO launching mobile services in mid-2017. 
  • Subsequently, we expect M1’s mobile ARPU to be negatively impacted by 15% by FY20. 
  • Correspondingly, our DCF-based target price (WACC: 7.1%) is cut by 18.4%, from $3.80 to $3.10. Maintain Hold. 
  • Its dividend yield of 6.1%-6.3% should help to provide support at current valuations. 

Sensitivity analysis on target price 

  • M1’s mobile ARPU could decline by a bigger magnitude if the new entrant employs more aggressive pricing strategies than expected. 
  • On the other hand, if the new entrant is not able to execute well in terms of mobile network rollout and building a strong brand, its impact on M1’s mobile ARPUs could be limited. 
  • Our sensitivity analysis suggests that our target price for M1 would fall to S$2.30 if its mobile ARPU is negatively impacted by 30% (bear-case) by FY20. 
  • If the negative impact on its mobile ARPU is only 5% (bull-case), our target price would be at S$3.70. 

Lacking ability to bundle 

  • Similar to the other two Singapore telco incumbents, we expect M1’s mobile network coverage/quality to be superior to the fourth mobile operator in the first five years after service launch. 
  • However, M1’s relatively higher prepaid revenue mix (including IDD calls) and inability to bundle pay TV services in a quad-play offering may put it in a weaker position in defending its market share against the fourth mobile operator. 

Dividend yield should provide some valuation support 

  • Based on a 100% payout ratio, we forecast M1 to pay a DPS of 19.9/21.0/20.7 Scts in FY15/16/17. This translates into decent dividend yields of 6.1%-6.3%, which may provide some support for its current valuations. 
  • Given net debt/EBITDA of 0.6x-0.7x over the next three years and spectrum payments in FY16 (1800MHz) and likely FY17 (900MHz), we do not see room for M1 to leverage up its balance sheet to pay special dividends. 
  • In addition, with the upcoming entry of a fourth mobile operator, M1 will probably also want to conserve some flexibility in its balance sheet to face any headwinds.

(FOONG Choong Chen, CFA)