M1 - RHB Research 2016-01-19: Bumping Up Capex

M1 LIMITED B2F.SI

M1 - Bumping Up Capex

FY15 results bore no surprises, with key takeaways the higher FY16 capex guidance and M1’s intention to conserve cash for the upcoming spectrum auction (likely in 3Q16).
Maintain BUY based on a revised DCF SGD3.20 TP (from SGD3.72, 23% upside) as we cut FY16-18 earnings forecasts by 9-12% (factoring in lower ARPU post FY17 from a fourth mobile entrant).
The sharp 25% 2015 share price correction has possibly priced in downside risks, to a certain extent.

4Q15 core earnings fell 1.6% YoY (+0.7% QoQ) on higher depreciation charges, bringing FY15 core earnings to SGD178.2m, at 98% of RHB and consensus estimates.
Service revenue grew 2.2% sequentially on seasonality. Fixed services, however, remained the bright spot (+14.4 QoQ, 28.6% YoY) as M1 encroaches further into the enterprise segment (7% of FY15 revenue) via new corporate and machine-to-machine (M2M) solutions.
4Q15 EBITDA ticked up 2% YoY, supported by higher other revenue (mainly from government grants and projects).
A lower final DPS of 8.3 cents was proposed.

While mobile internet revenue surged 29%, this was insufficient to offset the decline in voice/SMS revenue of 16%/21% YoY respectively.
M1 said the take-up of its Data Passport roaming plans has been well received, with 45% of outbound roamers turning on the service (45% of roaming traffic on data passport countries).

We now model a 15-20% ARPU decline into FY20 numbers (vs 5-10% previously) to reflect the rise in competitive activities. This assumes a late FY17/early-2018 commercial rollout by a new operator. FY16 projections have factored in the higher FY16 capex of SGD140m (SGD90m previously).
Key downside risks:
1. strongerthan-expected pressure on EBITDA margins, and
2. higher-thanprojected capex.

M1’s share price de-rated 25% in 2015 on concerns over the potential fourth entrant.
We think downside risks have more or less been priced in at 8x and 14x FY16F EV/EBITDA and P/E respectively (-1 to -2SD from the mean).
We roll over our base year to 2016 and lift WACC to 8.5% (from 7.5%) after updating our COE assumptions.
Our DCF-based TP drops to SGD3.20, with the c.6% dividend yield providing good share support.

Singapore Research RHB Invest | http://www.rhbinvest.com.sg/ 2016-01-19

RHB Invest SGX Stock Analyst Report BUY Maintain BUY 3.20 Down 3.72