M1 - DBS Research 2016-01-19: Negatives are priced in but uncertainty lingers

M1 - DBS Research 2016-01-19: Negatives are priced in but uncertainty lingers M1 LIMITED B2F.SI 

M1 Limited - Negatives are priced in but uncertainty lingers 

The stock has declined 35% from its peak in April 2015. 

  • The stock has declined in anticipation of the potential entry of a 4th mobile player. The winner could be announced by the end of 1Q16 while actual operations may start from 2Q17 onwards. 
  • M1 is cheap at 13.6x FY16F PE versus 16x for StarHub as it has 
    1. a 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 revenue. 
  • Conversely, if there is no 4th telco entry, M1 could benefit the most. 

Lower dividends than last year. 

  • 4Q15 net profit of S$43.6m (- 2.1% y-o-y) was in line. However, final DPS of 8.3 Scts (-30% y-o-y) was below expectations. 
  • FY15 dividend payout ratio stands at 80% versus 100% in FY14 as M1 wants to reserve cash for upcoming spectrum auction. 
  • Besides, we want to highlight that fixed service revenue grew 29% y-o-y in 4Q15 and made up 12% of the total service revenue. 

Our bear-case TP is S$2.20 while bull-case TP is S$3.40. 

  • Our base-case TP of S$2.60 assumes 10% adverse impact on M1’s revenue due to the 4th player in 2022, with EBIT margins falling to 16% versus 20% currently. 
  • Under our bear-case scenario, we assume a 12% adverse impact on revenue in 2022 with EBIT margins dropping to 15%. Our bear-case TP is S$2.20. 
  • Under our bull-case scenario, we assume that there is no 4th telco entry and no adverse impact on M1’s revenue in 2022 although EBIT margins may slip to 19%. Our bull-case TP is S$3.40. 


  • No changes to our DCF (WACC 6.8%, terminal growth 0%) based TP of S$2.60. 
  • Upgrade to HOLD. 

Key Risks to Our View: 

  • Non-entry of a 4th mobile player could lead to a relief rally. 
  • MyRepublic has completed a funding round to raise S$23m in Sep-15 which is not adequate for network rollout of US$250m- 300m.

Sachin Mittal DBS Vickers | http://www.dbsvickers.com/ 2016-01-19
DBS Vickers SGX Stock Analyst Report HOLD Upgrade FULLY VALUED 2.60 Same 2.60