M1 Limited - CIMB Research 2015-12-09: Most at risk from a fourth mobile operator

M1 LIMITED B2F.SI

M1 Limited - Most at risk from a fourth mobile operator

M1 has the most to lose from a new competitor given its largely Singapore mobile focus and weaker position to defend its market share from sans quad-play offerings.
FY15-17 dividend yields of 7.1-7.5% should help support current valuations. Special dividends are unlikely, in our view.
Modest 3-year EBITDA CAGR of +2.8% in FY15-17, and -2.9% in FY18-20.
Maintain Hold with unchanged DCF-based target price of S$3.10. Scenario analysis suggests target price of S$2.30 in a bear-case and S$3.70 in a bull-case.

Singapore mobile focus M1 stands to lose the most from new competition given its largely Singapore mobile focus. Similar to the other two Singapore telco incumbents, we expect M1’s mobile network coverage/quality to be superior to the fourth mobile operator in the first five years after service launch. However, M1’s relatively higher prepaid revenue mix (including IDD calls) and inability to bundle pay TV services in a quad-play offering may put it in a weaker position to defend its market share against a fourth mobile operator.

We have factored in a negative 15% impact to M1’s mobile ARPU between mid-2017 to 2020. The impact could be worse if the new entrant employs more aggressive pricing strategies, or more limited if the new entrant’s execution is poor (network, branding).
Our sensitivity analysis suggests that our target price would fall to S$2.30 if its mobile ARPU is negatively impacted by 30% (bear-case) by FY20.
If the negative impact on its mobile ARPU is only 5% (bull-case), our target price would be S$3.70.

Based on a 100% payout ratio, we forecast M1 to pay 19.9/21.0/20.7 Scts DPS in FY15/16/17. This translates into decent dividend yields of 7.1-7.5%.
Given net debt/EBITDA of 0.6-0.7x over the next three years and spectrum payments in FY16 and likely FY17, we do not see room for M1 to gear up its balance sheet to pay special dividends. M1 will probably also want to conserve some flexibility in its balance sheet to face any headwinds with the upcoming entry of a fourth mobile player.

We keep our core EPS for FY15-17 unchanged, which has factored in the initial impact from the fourth mobile network operator (MNO) launching services in mid-2017.
M1’s EBITDA is expected to rise at a modest 3-year CAGR of 2.8% in FY15-17, driven by low-single digit service revenue growth but gradually rising marginally on lower handset subsidies.
In FY18-20, we forecast EBITDA to decline at a 3-year CAGR of 2.9% factoring in pricing pressure from intensified competition.

Our DCF-based target price (WACC: 7.1%) of S$3.10 is intact. Maintain Hold.
M1 trades at FY16 EV/OpFCF of 10.9x, which is at a 20% discount to the average for ASEAN telcos, while its FY16 EV/EBITDA of 7.9x is in line.
Its dividend yield of 7.1-7.5% should help support current valuations.
Key upside risk is the non-entry of a fourth mobile player into Singapore.
Key downside risk is higher-than-expected negative impact on M1’s mobile ARPU from new competition.

FOONG Choong ChenCFA CIMB Securities | http://research.itradecimb.com/ 2015-12-09

CIMB Securities SGX Stock Analyst Report HOLD MAINTAIN HOLD 3.10 Down 3.10