M1 LIMITED
B2F.SI
M1 Limited - Down and still out
- New promos to put some pressure on mobile revenue in FY16-17. New player to drive it down 11% between 2017 and 2020.
- Healthy fixed services growth to help partially buffer weaker mobile revenue.
- EBITDA to stay flattish in FY16-17 and could decline by 19% from 2017-20.
- Payout ratio likely to stay at 80%, even if there is no new mobile entrant.
- Maintain Hold; target price cut to S$2.40 on lower EBITDA and higher capex.
Soft mobile revenue before bigger decline in 2018
- We met up with M1 last week. We expect its mobile service revenue to be slightly under pressure in FY16/17 (-0.6%/-0.4%) due to the recent launch of lower priced sim-only plans and upsized data promos.
- Thereafter, we expect mobile service revenue to fall by 11.2% between 2017 and 2020 as competition intensifies once the potential fourth mobile player launches its service in early-2018.
Fixed services growth will help to provide some cushion
- We expect fixed services revenue to grow by a healthy three-year CAGR of 15.8% in FY16-18, driven by new government contracts, gradually rising corporate market share (only c.5% now) and growth in residential fibre subscribers.
- Growth in fixed services, which formed 10.4% of FY15’s total service revenue, will help to prevent revenue from falling in FY16/17 (+0.5%/+0.6%) and lessen the drop to 7.5% between 2017 and 2020.
EBITDA to stay flattish in FY16-17; 19% decline from 2017-20
- EBITDA should rise by a modest 0.8%/1.1% yoy in FY16/17, based on our forecast. Margin is projected to inch up by 0.1%/0.2% pts yoy to 41.0%/41.2% due to a gradual reduction in handset subsidies.
- Driven by a substantial drop in revenue, we forecast EBITDA to fall by 19.0% from 2017-20, with margin falling to a low of 36.0% in 2020.
- In our bear/bull case, EBITDA could fall by 43%/10% over the same three-year period.
Capex to stay high for another two years
- Capex is likely to stay high at c.S$130m-140m p.a. (capex/sales: 15.6%-15.7%) in FY16-17 before easing to S$120m p.a. over the long-term.
- About S$100m will be spent on mobile network maintenance/upgrades, while the remaining S$30m-40m will be largely on fibre investments (to connect more buildings and for mobile backhaul).
Payout ratio increase and special dividends unlikely
- Even if there is no entry of a fourth mobile player, we do not expect M1 to raise its payout ratio (FY15: 80%) or pay special dividends in the next two years.
- Due to high capex and spectrum payments, we forecast net debt/EBITDA at 1.1x/1.1x/1.0x by endFY16/17/18, which is within its optimal capital structure range of 1.0x to 1.5x.
Maintain Hold; DCF-based target price cut to S$2.40
- We cut FY16/17/18 EBITDA by 7.3%/5.6%/9.4% (EPS: 9.3%/7.7%/16.6%) due to lower mobile revenues.
- Coupled with higher capex, we lower our DCF-based target price by 22.6% to S$2.40. M1’s valuation is still not attractive, with FY16 EV/OpFCF of 12.7x climbing to 16.5x in FY20 once earnings hit its trough.
- While its yield looks attractive, we think it is only just adequate to compensate investors for future earnings risks.
FOONG Choong Chen CFA
CIMB Securities
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http://research.itradecimb.com/
2016-04-12
CIMB Securities
SGX Stock
Analyst Report
2.40
Down
3.10
