M1 - DBS Research 2016-04-14: Earnings miss; range bound till clarity on 4th telco emerges

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M1 LIMITED B2F.SI 

M1 - Earnings miss; range bound till clarity on 4th telco emerges 

• Net profit of S$ 42.5m (-7% y-o-y, -3% q-o-q) was 6-7% below expectations 
• High handset subsidies due to early release of Samsung Galaxy 7 was the key reason 
• Mobile revenue weak due to SIM-only plans; FY16F/FY17F earnings revised down 
• Maintain HOLD with revised S$ 2.56 TP 

The stock has declined c. 38% from its peak in April 2015. 

• M1’s share price has been declining in anticipation of the potential entry of a 4th mobile player. The spectrum auction is likely to happen in 3Q16, though details are not finalised yet. 
• M1 looks cheap at 13.4x FY16F PE versus 15.2x 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, M1 could benefit the most. 

1Q16 earnings 6-7% below our estimates due to higher handset subsidies. 

• Earnings suffered due to the timing of the release of Samsung Galaxy S7 in March 2016 while Galaxy S6 was released in April last year. 
• Higher depreciation also contributed to lower than expected earnings. 
• Revenue was tempered by faster than expected decline in mobile ARPU due to the rising popularity of SIM-only plans, and roaming decline. 
• We have trimmed FY16F/17F earnings by 3% each to factor cheaper data pricing. 

Most of the downside is priced in. 

• Given the uncertainty on 4th telco, we think, the stock will be range bound till more clarity emerges. Our base-case assumes 10% adverse impact on M1’s revenue due to the entry of the 4th player in 2022, with EBIT margins falling to 16% versus 20% currently. 
• Under our bearcase scenario, we assume a 12% adverse impact on revenue in 2022 with EBIT margins dropping to 15%. Our bear-case TP is S$2.15. 
• Under our bull-case scenario, we assume that there is no 4th telco and no adverse impact on M1’s revenue in 2022 although EBIT margins may slip to 19%. Our bull-case TP is S$3.30. 

Valuation: 

• We maintain HOLD on our revised TP of S$2.56 based on DCF valuation (WACC 6.8%, terminal growth 0%). 

Key Risks to Our View: 

• Non-entry of a 4th mobile player could lead to a relief rally. 

Sachin Mittal DBS Vickers | http://www.dbsvickers.com/ 2016-04-14

DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 2.56 Down 2.60