M1 Limited - DBS Research 2015-10-14: More Downside Due to Fourth Telco

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M1 LIMITED B2F.SI 

M1 Limited - MORE DOWNSIDE DUE TO FOURTH TELCO 

• A lower dividend payout ratio cannot be ruled out. We expect M1’s dividend payout ratio to be lowered to 90% versus 100% last year in anticipation of higher competition ahead. 
• Despite the recent share price decline, M1 is still not cheap at 15x FY16F PE keeping in mind that earnings are likely to decline from FY17F onwards. 
• The winner of the reserved spectrum will be announced in 1Q16 while actual operations of the fourth mobile player could start from 2Q17 onwards. M1 could be more impacted than its peers due to 
  1. more price sensitive user base; 
  2. lesser number of subscribers on bundled offerings; and 
  3. larger exposure to the mobile sector as a percentage of group revenue. 

MyRepublic completed a funding round to raise S$23m 

• MyRepublic completed a funding round to raise S$23m in Sep-15. Brunei’s largest telecom operator, DST Communica 15 tions, was among the major investors. MyRepublic estimates that it requires S$250m capex for the network rollout, the bulk of which could be raised through vendor financing in our view. 

Expect 10% adverse impact on revenue by 2022 due to the fourth player. 

• We model a 7% revenue share for the fourth player fourth mobile player by 2022 and expect a 10% adverse impact on M1’s revenue in 2022 versus 4% for StarHub. The entry of a fourth mobile player will depend on the success of Hetnet trials by the end of 2015. HetNet could result in much lower capex for the fourth mobile player, boosting its business case to lure customers with cheaper data pricing. 

Valuation: 

• We lower terminal growth rate to 0% from 1% previously in our DCF valuation (WACC 6.8%) to derive a revised TP of S$2.60. 
• We maintain FULLY VALUED. 

Key Risks to Our View: 

• Unsuccessful Unsuccessful successfulHetNet trails or inability to raise adequate funding trails or inability to raise adequate funding trails or inability to raise adequate funding. Without HetNet, capex requirements could increase significantly. 
• Another risk will be the fourth player’s inability to raise adequate funding for network rollout.

Sachin Mittal DBS Vickers | http://www.dbsvickers.com/ 2015-10-14

DBS Vickers SGX Stock Analyst Report FULLY VALUED Maintain FULLY VALUED 2.60 Down 2.94