M1 - UOB Kay Hian 2016-01-19: 4Q15 ~ More Contributions From Corporate Customers

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M1 LIMITED B2F.SI 

M1 (M1 SP) 4Q15: More Contributions From Corporate Customers 

• M1’s 4Q15 results were above expectations. We see two positive drivers: 
  1. stronger growth for post-paid subscriber base at 4%, and 
  2. continued expansion of its fibre broadband subscriber base with corporate customers contributing to higher ARPU of S$47.50. 
• The stock is out of favour but we see an opportunity for a strong rebound in the event that we do not have a fourth mobile operator. 
• Maintain BUY with a higher target price of S$3.34. 

RESULTS 

• M1 reported net profit of S$43.6m for 4Q15, ahead of our expectations of S$37.3m. 

Recovery in growth for post-paid mobile. 

• M1 gained a strong 15,000 post-paid subscribers mainly for its SurfShare plans and SIM-only plans, which does not incur handset subsidies. Post-paid subscriber base expanded by a stronger 4% yoy. Post-paid ARPU was seasonally higher and increased 0.7% qoq to S$61.60. Handset subsidies were lower at S$23.6m compared with our expectations of S$26.8m. 
• 74% of M1’s post-paid subscribers have migrated to tiered data plans, of which 21% exceeded their data bundles. Average usage for data is 3.3GB, an increase of 10% yoy. Mobile data contributed 51.2% of service revenue. 

Sustained growth momentum in fibre broadband. 

• M1 added 8,000 fibre broadband subscribers and its fibre broadband subscriber base expanded by 24.3% yoy. Fibre broadband ARPU expanded 2.4% yoy to S$47.50 due to contribution from corporate customers who account for 11% of M1’s fibre broadband subscribers. 

Stable EBITDA margin. 

• EBITDA margin was stable at 42.2%. M1 has a strong balance sheet with net debt/EBITDA at 1.0x. 
• The board has declared final dividend of 8.3 S cents/share for 2015. Dividend payout ratio is 80.3%, lower than 99.7% for 2014. 

STOCK IMPACT 

Guidance for 2016. 

• Management has guided for a stable bottom-line in 2016 after factoring in higher depreciation. Capex is estimated at S$140m for 2016, higher than S$120m for 2015. 

Expanding fixed network services. 

• M1 has expanded its enterprise solutions through an extensive range of GPON (gigabit passive optical network) corporate connectivity services. The new XGPON service, offering speeds ranging from 2-10Gbps, is the fastest fibre service on Next Gen Nationwide Broadband Network (NGNBN). M1’s XGPON services are scalable and cost-effective and particularly suitable for businesses with high bandwidth requirements, such as gaming and media companies. 
• M1 will invest in fibre infrastructure to enhance coverage and extend its reach to corporate customers. It aims to provide diversity and backup path for its corporate customers who need redundancy for mission critical applications. 
• Corporate customers account for 11% of M1’s fibre broadband subscriber base but generate half of its revenue from fibre broadband. M1 is a sub-contractor to NetLink Trust, who owns the core fibre infrastructure for NGNBN. Hence, M1 is better positioned to influence the timeliness of service provisioning to its corporate customers. Fixed network services accounted for 11.8% of its service revenue. 

Timeline for auction. 

• Management expects iDA to announce framework for the upcoming spectrum auction by Mar 16. The auction should be conducted in Sep 16, six months before the expiry of the 900MHz frequency spectrum. 

EARNINGS REVISION/RISK 

• Our earnings forecast for 2016 remains unchanged. 
• We have increased our earnings forecast for 2017 by 4% due to increased contributions from fixed network services and corporate customers. 

VALUATION/RECOMMENDATION 

Maintain BUY. 

• We have conducted a scenario analysis based on two possible outcomes: Scenario A - No new entrant, and Scenario B - Fourth mobile operator disrupts the status quo. We attribute a probability of 75% for Scenario A and 25% for Scenario B. Our probability-weighted target price for M1 is S$3.34. 
• In the event that we do not have a fourth operator (Scenario A), our target price for M1 would be S$3.69 (Upside: 41.4%). In the event that a fourth operator enters the mobile market (Scenario B), our target price for M1 would be S$2.27 (Downside: 13%). 
• Our target price for M1 is based on DCF (COE: 6.8% for Scenario A and 7.8% for Scenario B, terminal growth: 1.0%). 

SHARE PRICE CATALYST 

• M1 provides attractive dividend yield of 5.7%. 
• Investors flocking back to M1 in the event that we do not have a fourth mobile operator.

Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-01-19

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 3.34 Up 3.26