M1 - UOB Kay Hian 2016-04-14: 1Q16 Mobile ARPU Diluted By SIM-only Plans

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M1 LIMITED B2F.SI 

M1 (M1 SP) 1Q16: Mobile ARPU Diluted By SIM-only Plans 

• Revenue from post-paid mobile contracted 1.8% yoy because post-paid ARPU saw a 4.9% qoq dilution due to the increased take-up of SIM-only plans and shared plans. 
• Fibre broadband maintained steady progress. 
• Our recommendation for M1 is under review as we are monitoring the progress of fundraising at ConsisTel/OMGtel and MyRepublic. 
• One of them could evolve to become the fourth mobile operator in Singapore. 
• Target price: S$3.02. 

RESULTS 

• M1 reported net profit of S$42.5m in 1Q16, in line with our expectation of S$43.8m. 

Contraction in mobile revenue. 

• M1 added 13,000 post-paid subscribers and its post- paid subscriber base expanded 4.4% yoy. There was a higher take-up of SIM-only plans and shared plans, which diluted post-paid ARPU by 4.9% qoq to S$58.60. Post-paid ARPU was also affected by lower contributions from roaming. 
• M1 added just 1,000 pre-paid subscribers and its pre-paid subscriber base expanded 3% yoy. Pre-paid ARPU had also declined 5.7% qoq due to lower usage for voice and iDD. 

Continued growth from data. 

• Average usage of data increased by a gradual 3% yoy to 3.3GB/month. 
• Data contributed 53.1% of mobile service revenue. 

Neutral impact from handset subsidies. 

• Handset subsidies were stable at S$22m. SIM-only plans do not incur costs related to handset subsidies. However, this was offset by the shift in mix of handsets towards Android-based smartphones where handset subsidies are expensed off upfront. 
• The launch of the Samsung Galaxy S7 in March was reasonably well received. 

Steady expansion for fibre broadband. 

• M1 added 8,000 fibre broadband subscribers. There was also contribution from a government agency contract secured in 4Q15. 
• ARPU eased 1.3% qoq to S$46.90 due to a higher proportion of take-up from the residential market. 
• Contribution from fibre broadband expanded by 2.6ppt yoy to 12% of total service revenue in 1Q16. 

Stable EBITDA margin. 

• EBITDA margin was stable at 40.9%. Management imposed cost discipline and reduced staff costs by 5.6% yoy. Net profit declined by 6.9% yoy due to higher depreciation. 
• M1 has a strong balance sheet with net debt/EBITDA at 0.9x. 

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 the Next Gen Nationwide Broadband Network (NGNBN). 
• M1’s XGPON services are scalable and cost-effective. It is 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 a backup path for its corporate customers who need redundancy for mission critical applications. 
• M1 will also invest in its backhaul transmission network. 

Impending launch of MVNO. 

• M1 has entered into agreement to provide voice, SMS and data services on a wholesale basis to Liberty Wireless, a mobile virtual network operator (MNVO). Liberty Wireless will operate under the Circles Asia brand. 
• Liberty Wireless intends to focus on post-paid mobile customers. It prides itself on offering the most innovative data packages. 
• Liberty Wireless was originally scheduled to commence commercial operations by end- 15. The much awaited launch is expected to take place in 2Q16. 

EARNINGS REVISION/RISK 

• We maintain our existing earnings forecast. 

VALUATION/RECOMMENDATION 

• Under review. Our probability-weighted target price is S$3.02 (best case: S$3.89, worst case: S$2.14). The risk-reward trade-off is favourable with potential upside of 56.9% vs potential downside of 13.7%. 

SHARE PRICE CATALYST 

• M1 provides attractive dividend yield of 6%. 
• Confirmation on whether Singapore will have a fourth mobile operator.

Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-04-14

UOB Kay Hian SGX Stock Analyst Report UNDER REVIEW Maintain BUY 3.02 Same 3.02