RHB Research 2015-07-21: M1 - A Weaker 1H15 Call. Maintain BUY.

A Weaker 1H15 Call 

  • M1’s 1H15 results fell marginally short of consensus/our projections on weaker-than-expected 1H15 mobile revenue momentum (+0.4% YoY). 
  • Maintain BUY with a lower DCF-based TP of SGD3.72 (15% upside, from SGD4.40), after reducing our FY15-16 core earnings estimates and tagging a higher risk premium to build in competitive risks from a new entrant. 
  • M1’s prospective dividend yields of over 6% should provide good share price support. 

 A slight miss. 

  • 2Q15 core earnings of SGD45m (+2.3% YoY) brought 1H15 core earnings to SGD90.7m (+4.5% YoY), slight short of RHB and consensus’ full-year estimates at 47-48%, mainly due to weaker-thanexpected mobile revenue in 2Q15 despite a low base in the March quarter. 
  • An in-line interim 7 cents/share DPS has been declared. 

 Operational highlights. 

  • Service revenue fell 2.3% YoY in 2Q15 (1H15:- 1.0% YoY) as the structural erosion in international call revenue persisted (1H15: -25% YoY). 
  • The impact was, however, neutral on EBITDA due to lower-margin destinations such as India and Bangladesh. 
  • Prepaid and postpaid revenues contracted 5% and 0.1% YoY on lower international traffic and higher amortisation of accrued handset revenues in relation to the strong iPhone 6 off-takes, which offset the higher percentage of customers on tiered data plans, at 72% vs 68% in 1Q15. 
  • Subscriber acquisition cost (SAC) fell 13% QoQ on lower handset sales. 

 Forecast and risks. 

  • We reduce our FY15-16 core earnings estimates by 3-6% post the results call, mainly to factor in slower mobile service revenue growth momentum. 
  • Key earnings risks are: 
    1. stronger-thanexpected competition in the market, 
    2. higher-than-expected capex, and 
    3. larger-than-expected SAC. 

 Maintain BUY; TP cut. 

  • We lower our TP to SGD3.72 (from SGD4.40) after raising our WACC assumption to 7.5% from 7% to factor in the competitive risks associated with a potential new entrant into the market. 
  • Nonetheless, we think the 12% de-rating in M1’s share price over the past three months has more or less priced in the downside risks from a new entrant. 
  • We are of the view that the threat from a new operator has reduced with the Infocomm Development Authority (IDA) not granting concessions in relation to domestic roaming/infrastructure sharing.

(Singapore Research)

Source: http://www.rhbgroup.com/