M1 - DBS Research 2016-07-05: Switching to our bull-case target price

SGinvestors.io

M1 LIMITED B2F.SI 

M1 - Switching to our bull-case target price

• Singapore likely to remain a three-player market, as newcomers find it difficult to raise sufficient funds.
• M1 has most to gain from non-entry of 4th player.
• Reiterate BUY with a revised TP of S$3.30.

M1’s prospects brighten as likelihood of a new entrant is getting lower. 

• We see a low probability of a new mobile entrant, as interested players face difficulty in raising sufficient funds due to three key factors. 
• M1 has declined c.30% since April 2015 and will benefit the most if Singapore remains a three-player market.

Three key factors discourage the entry of a new player. 

1. The lack of a domestic roaming agreement in Singapore as we are not aware of any success story globally without roaming in place. In India and Malaysia, new 4G entrants – Reliance Jio and Telekom Malaysia respectively – have roaming agreements in place. 
2. By lowering the additional data price 25-50% in March 2016, Singapore telcos have shown their intent to defend their subscriber bases even at the cost of future profitability. 
3. Potential launch of 5G in 4-5 years will lead to another round of capex, making balance sheet strength even more critical. 

• According to the press reports, MyRepublic has raised S$130m in debt funding as of late June, ~50% of its target of S$250m-300m. However, equity funding will be the key for successful debt funding in our view, which we are yet to see.

M1’s bottom-line to be steady but capex could rise in the long term. 

• We believe M1 will see flattish earnings over the next 2- 3 years due to the effects of data price declines, accompanied by lower handset subsidies. However, we project higher capex from FY20F onwards due to 5G rollout.

Valuation:

• We reiterate BUY for M1 with a higher DCF-based TP of S$3.30 (WACC 6.8%, terminal growth 0%), as we lift our FY18F/19F earnings by 3%/8% assuming a three-player market. 
• The counter provides 21% potential upside in addition to 5.4% yield based on 80% earnings payout.

Key Risks to Our View:

• Successful entry of a new player. A well-funded new entrant could capture 6% revenue share which will result in 15% revenue drop and 20% earnings drop for M1 by 2022, leading to our bear-case TP of S$2.60.

Sachin Mittal DBS Vickers | http://www.dbsvickers.com/ 2016-07-05

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 3.30 Up 2.60