M1 Limited - CIMB Research 2016-04-12: Down and still out

M1 Limited - CIMB Research 2016-04-12: Down and still out 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 | http://research.itradecimb.com/ 2016-04-12
CIMB Securities SGX Stock Analyst Report HOLD MAINTAIN HOLD 2.40 Down 3.10