M1 - DBS Research 2016-06-03: +40% Reward vs -5% Risk

SGinvestors.io

M1 LIMITED B2F.SI 

M1: +40% Reward vs -5% Risk 

• Stock has declined 40% since Feb 2015; now trading at 13x FY16F PE, cheapest in the region 
• Very attractive risk/reward ratio with potential risk of -5% versus total returns of +40% 
• Upgrade to BUY on revised TP of S$ 2.60 

The stock has declined 40% since Feb 2015; cheapest in the region at 13x FY16F PE. 

• M1’s share price has declined in anticipation of the entry of a fourth mobile player. 
• Our TP of S$2.60 factors the impact of potential new entrant on M1. 
• While a spectrum auction is scheduled in 3Q16, the big question is if the interested players can raise adequate funds for the network rollout before the auction. 
• Conversely, if there is no fourth telco entry, M1 could benefit the most as reflected in our bull-case TP of S$3.30 implying potential returns of c.40%. Under our bear-case scenario of an overly aggressive new entrant, we see potential return of -5% based on our bear-case TP of S$2.15. 

In the absence of domestic roaming, potential new entrant will need to cover the entire island from scratch. 

• U Mobile in Malaysia, for example, managed to capture 5% revenue share in 2014, after seven years of its launch in a prepaid dominated market. Singapore is a postpaid dominated market with 18-24 months contracts and our assumption of a 6% revenue share for the new entrant in 5-years is reasonably optimistic. 

Our key projections. 

• Our base-case projects M1’s cellular revenue to drop 15% by 2022 versus 2015. This will lead to a 20% drop in net profit to S$143m by 2022, partially offset by lower handset subsidies. Based on 80% payout ratio, M1’s dividend yield is projected to be ~5% in 2022. 
• Under our bear-case scenario of an overly aggressive new entrant, we assume a 20% drop in service revenue by 2022, leading to a 28% drop in M1’s profit to S$129m by 2022. 
• Under our bull-case scenario, we assume non-entry of a new player and stable profits. 

Valuation: 

• We upgrade M1 to BUY on DCF-based TP of S$2.60 (WACC 6.8%, terminal growth 0%) as we slightly tweak our long term revenue and capex assumptions. 
• BUY for potential return of 14% including 6% yield as negatives are already priced in. 

Key Risks to Our View: 

• Better than expected performance by a new entrant. A better than expected performance from a new player will impact M1 due to its higher reliance on the mobile business

Sachin Mittal DBS Vickers | http://www.dbsvickers.com/ 2016-06-03

DBS Vickers SGX Stock Analyst Report BUY Upgrade HOLD 2.60 Up 2.56