M1 Limited - CIMB Research 2016-04-13: 1Q16 Softer earnings were not a surprise

M1 LIMITED B2F.SI

M1 Limited - 1Q16: Softer earnings were not a surprise

1Q16 results were in line. 1Q16 net profit was 24%/24% of our/Bloomberg consensus FY16 forecasts.
Negative: Mobile service revenue was softer yoy. Positive: EBITDA margin widened.
Maintain Hold, with unchanged DCF-based target price of S$2.40 (WACC: 7.1%).

EBITDA fell by 2.2% qoq (+0.4% yoy) in 1Q16, largely due to seasonally lower mobile service revenue.
1Q16 core net profit was down slightly by 1.3% qoq but fell by a steeper 6.6% yoy due to higher depreciation on a bigger fixed asset base.
1Q16 core net profit was in line, coming in at 24%/24% of our/consensus estimates.
As usual, no dividends were declared in 1Q16.

Mobile service revenue fell 1.9% yoy (-3.0% qoq) in 1Q16. Postpaid revenue was down 1.8% yoy (-3.1% qoq) due to dilution from sim-only and shared plans, as well as lower roaming usage. Meanwhile, prepaid revenue fell 2.1% yoy (-2.1% qoq) due to lower voice and IDD call usage.
Subs on tiered data plans only inched up 1% pt qoq to 75% in 1Q16, of which 20% (4Q15: 21%) exceeded their data allowance. This suggests that it will be increasingly difficult to increase excess data usage revenues, especially with the recent upsized data promotions and increased data quotas across M1’s sim-only plans.

Fixed services revenue rose 26.9% yoy (-0.8% qoq) and formed 12.0% of 1Q16 service revenue (vs. 9.4% in 1Q15).
Fibre customers increased by a healthy 8k qoq to 136k, driven largely by residential but also some corporate customers. In our view, revenues will continue to rise in FY16, as M1 won a few multi-year government contracts for fibre connectivity in 2H15.

EBITDA margin on service revenue rose 0.3% pt yoy to 40.7% in 1Q16, thanks to lower marketing, bad debts and staff costs, which helped to offset higher handset subsidies due to the launch of the Samsung Galaxy S7 in Mar.
Qoq, 1Q16 EBITDA margin widened 0.2% pt after seasonally-high opex in 4Q15 (marketing, subsidies).

Our earnings forecasts and DCF-based target price are unchanged. We expect muted EBITDA growth in FY16-17, before a steep 19% drop in FY17-20 due to intensifying competition from the possible fourth mobile operator.
We think that M1’s valuation is still unattractive at FY16 EV/OpFCF of 12.7x, which we forecast will climb to 16.5x in FY20 once earnings hit trough.
While FY16-17 dividend yields looks attractive, we think that it is merely adequate to compensate investors for future earnings risks.

FOONG Choong Chen CFA CIMB Securities | http://research.itradecimb.com/ 2016-04-13

CIMB Securities SGX Stock Analyst Report HOLD MAINTAIN HOLD 2.40 Same 2.40