Flat results due to industry-wide challenges
- 2Q15 net profit of S$44.3m (+1% y-o-y, -3.1% q-o-q) was slightly below our S$46m estimate
- Interim dividend per share of 7Scts flat y-o-y was in line
- High customer acquisition costs due to iPhone6's popularity was the key culprit, while postpaid ARPU did not rise either, due to declining voice minutes
- Maintain BUY with unchanged TP of S$3.60 for over 6% yield
Highlights
High customer acquisition cost.
- Acquisition cost per postpaid customer stood at S$342, down 13% q-o-q but up 28% y-o- y.
- Generally handset subsidies declined sharply in 2Q versus 1Q but it was different this time round due to the continued popularity of iPhone 6.
- Postpaid ARPU did not rise either. Gross postpaid ARPU of S$62.3 (-0.3% y-o-y, +0.2% q-o-q) remained flat as the rise in data revenue was offset by decline in voice revenue.
- This is a matter of concern for the whole sector as M1 is relatively more insulated than others due to its fair value accounting for iPhones and lower reliance on voice roaming revenue.
Outlook Potential 4th telco could face multiple operating challenges.
- The biggest challenge would be getting the sites for rooftop towers. As we understand, building owners are required to provide free access for in-building coverage but not for towers. Most of the sites are already occupied by existing telcos.
- We believe network capex for 4th telco could well exceed US$500m versus US$250m-300m capex intended by MyRepublic. Besides, a 60% lower reserve price may not be realised due to competition between MyRepublic and OMGTel if both decide to bid for the spectrum despite these challenges M1 could lose up to 10% of its revenue by 2022 if 4th telco can sail through these challenges successfully.
- In Malaysia, the 4th mobile player - U Mobile - has captured only 6-7% revenue share after six years.
- Singapore is a postpaid- dominated (unlike Malaysia) market with handset subsidies, multi-product bundling and 2-year contracts.
- We model a 7% revenue share for the new telco by 2022.
- We have factored in a 10% adverse impact on M1’s revenue in 2022 versus 4% adverse impact on StarHub’s revenue.
Valuation:
- We use DCF (WACC 6.8%, terminal growth 1%) to derive a target price of S$3.60.
- We maintain BUY on M1 as we do not anticipate new entrants to have deep pockets.
- We have factored up to 10% adverse impact on M1’s revenue by 2022 in our valuation. With a 100% payout ratio, M1 offers a FY15F 6.4% dividend yield, better than ~5% offered by its local peers.
Key Risks:
Decline in mobile roaming.
- Potential decline in mobile roaming could more than offset the gains from mobile data- repricing and overall ARPU could decline.
(Sachin MITTAL)
Source: http://www.dbsvickers.com/
