Unwelcome Decline In Mobile Revenue
- The decline in revenue for post-paid mobile highlights the loss of growth momentum even before the entry of a fourth mobile operator.
- M1 is not out of the woods given headwinds from the potential entry of a fourth mobile operator and reversal of yield compression.
- Maintain SELL. Target price: S$3.08.
RESULTS
• M1 reported net profit of S$44.3m for 2Q15 (+1% yoy), which is below our expectations of S$47m.
- Mobile suffered revenue contraction of 0.8% yoy.
- The bulk of the revenue decline was caused by the pre-paid segment, which contracted 4.9% yoy due to the shrinkage of subscriber base as a result of new regulation.
- Nevertheless, the post-paid mobile revenue was also stagnant and declined by a marginal 0.1% yoy. Post-paid subscriber base expanded by only 1.8% yoy but post-paid ARPU contracted by 0.3% yoy.
• Steady expansion in fibre broadband.
- M1 continued to add 6,000 fibre broadband subscribers in 2Q15.
- ARPU for fibre broadband increased 10.5% yoy and 2.2% qoq due to take-ups from corporate customers.
- We estimate that fibre broadband accounted for 7.6% of service revenue.
• Less international calls.
- Volume of international retail minutes declined 29.3% yoy and 6.5% qoq.
- Management explained that the drop in iDD calls was caused by fewer calls made to Bangladesh and India.
- We believe there is cannibalisation on iDD calls as prepaid subscribers are increasingly using data and messaging apps.
• Stable margins.
- M1 has trimmed advertising & promotion and general & admin expenses, which has helped to maintain EBITDA margin at 40.8%.
STOCK IMPACT
• Maintain guidance for 2015.
- Management has guided moderate growth for net profit in 2015.
- Capex is estimated at S$120m for 2015. M1 is currently conducting trials on small cells at high traffic locations.
• Not out of the woods.
- The Infocomm Development Authority (IDA) has initiated a new round of industry consultation on the proposed spectrum auction to enhance competition in the mobile market. The IDA targets to finalise the auction framework by end-15 and the auction should be conducted in early-16.
- It expects the new entrant to achieve nationwide deployment by Sep 18 and will phase in the implementation of quality of service and resilience requirements.
• Facilitating entry of MVNOs.
- M1 has entered into agreement to provide voice, SMS and data services on a wholesale basis to Liberty Wireless, a mobile virtual network operator (MNVO).
- Liberty Wireless will operate under the Circles Asia brand and is scheduled to commence commercial operations by end-15. It focuses on post-paid mobile customers.
- Liberty Wireless prides itself in offering the most innovative data packages and unparalleled customer experience. Not much detail was available on Liberty Wireless’s products offerings but management believes they are complementary to M1.
- Including Liberty Wireless, M1 would be hosting a total of three MVNOs.
• M1 has declared an interim dividend of 7 S cents, similar to last year.
- The dividend payout ratio was 72.9% for 1H15.
EARNINGS REVISION/RISK
- We have reduced our earnings forecast for 2015 by 6.1% and for 2016 by 8.4% due to the slowdown in the mobile business and continued decline in retail minutes for international call services.
VALUATION/RECOMMENDATION
• Multiple headwinds.
- There are uncertainties regarding whether Singapore will have a fourth mobile operator. M1 would be most affected if a fourth mobile operator gains entry as mobile accounted for 78.3% of its service revenue.
- Our concern about reversal of yield compression remains valid as the Federal Reserve should commence normalisation of US interest rates in 2H15.
• Maintain SELL.
- We have lowered our target price for M1 to S$3.08 based on DCF (cost of equity: 7.7%, terminal growth: 1.0%).
SHARE PRICE CATALYST
- The IDA finalising the framework and time schedule for the upcoming spectrum auction.
- Federal Reserve commences normalisation of US interest rates.
(Jonathan Koh, CFA)
Source: http://research.uobkayhian.com/
