DBS Group Research 2015-07-27: M1 Limited - ARPU concerns. Downgrade to FULLY VALUED.

ARPU concerns 


  • Postpaid ARPU may decline due to flat data usage and decline in legacy revenue. 
  • iPhone 6’s popularity is a burden at least in FY15F, although M1 is more resilient. 
  • Downgrade to Fully Valued with revised TP of S$2.94. 


Postpaid ARPU may decline due to flat data usage and decline in legacy revenue. 


  • Voice and SMS accounted for over 50% of the mobile revenue in 1H15, roaming revenues contribute ~10% of mobile revenue which, will continue to decline sharply. 
  • Meanwhile, data usage may be flattish, as seen in markets such as Korea when 4G penetration reaches 65- 70%. 
  • M1 disclosed that 72% of its subscribers are on tiered-data plans (4G), with 23% of them exceeding their data caps in 2Q15. 
  • Average data usage per person was flat q-o-q at 3.2GB in 2Q15, which is a cause for concern. 


iPhone 6’s popularity is a burden – at least in FY15F. 


  • Apple reviews the postpaid plans and handset subsidies offered by telcos and expects telcos to bear the marketing expenses for iPhones. 
  • Samsung, on the other hand, allows telcos to decide the subsidy levels and incurs the marketing expenses for Samsung phones. 
  • By using fair value accounting (FVA) for iPhones, M1 is able to smoothen its earnings but its free cash flow will still be impacted due to higher subsidies. 


We cut our FY15F/16F earnings for M1 by 4%/9%. 


  • We assume that postpaid ARPU will decline 1% each year versus +1% growth assumption earlier. 
  • In addition, we have assumed that M1 will have to increase its normalised capex (excluding spectrum)-to-sales ratio to 12% vs. our 11% assumption earlier due to more competition from the 4th telco. 
  • We use discounted cash flow valuation (WACC 6.8%, terminal growth 1%) to derive a target price of S$2.94. 
  • M1 could lose up to 10% of its revenue by 2022 due to the entry of the 4th telco, based on our estimates


(Sachin MITTAL)

Source: http://www.dbsvickers.com/



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