M1 LIMITED
B2F.SI
M1 - Non-cash items hurt bottom line, solid cash generation
- 2Q16 net profit of S$ 41.0m (-13% y-o-y, -7% q-o-q) was 3% below our expectations; 1H16 dividend of 7 Scts (flat % y-o-y) was inline.
- Adverse impact is non-cash in nature due to Fair Value accounting for iPhone sales; excluding this issue, net profit would have been up 15% y-o-y.
- Management revised down the net profit guidance from stable to a single digit decline.
- Maintain BUY with unchanged TP of S$ 3.30.
Revenue hit by lower handset sales and service revenue.
- 2Q16 revenue of S$ 240.4m (-13% y-o-y, - 7% q-o-q) was adversely impacted by lower handset sales. The drop in mobile and IDD revenues also hurt top line. However, fixed segment continued to show strong growth with +27% y-o-y growth.
Profit impacted by non-cash items.
- Accrued handset revenue decreased ~S$ 12m in 2Q16 to S$74 m from S$86m in 1Q16 due to lower iPhone sales.
- As M1 uses Fair Value Accounting for iPhone sales, this had an adverse impact on revenue and profits. However, this impact is non-cash in nature as reflected in higher free cash flow of S$50.3m (+60% y-o-y).
- Excluding this impact, we estimate that M1 would have reported S$51m earnings (+15% y-o-y)
Lower guidance for FY16.
- M1 is seeing higher depreciation and amortization due to the expanded fixed asset base relating to M1’s fibre roll out and investments in digital services.
- Management has downgraded its guidance from stable net profits to a single digit decline in FY16, which we attribute to lower iPhone sales potentially resulting in higher non- cash impact on revenue.
- We have revised down our estimates for FY16F/FY17F by 3%/3% accordingly.
Probability of a new entrant is low.
- We see a low probability of a new mobile entrant, as interested players face difficulty in raising sufficient funds. Three key factors discourage the entry of a new player:
- The lack of a domestic roaming agreement in Singapore, as we are not aware of any success story globally without roaming in place;
- Incumbents showing their willingness to defend their subscriber bases even at the cost of future profitability, by cutting data prices sharply and
- Potential launch of 5G in 4- 5 years will lead to another round of capex, making balance sheet strength even more critical. However, the time line for spectrum auction has been forwarded to 4Q16 from 3Q16 earlier.
Valuation
- We reiterate BUY for M1 with unchanged DCF-based TP of S$3.30 (WACC 6.8%, terminal growth 0%), as our earnings revision is non-cash in nature.
- Given healthy free cash flow, we think that M1 can sustain stable dividends (5.5% yield) in absolute terms.
Sachin Mittal
DBS Vickers
|
http://www.dbsvickers.com/
2016-07-18
DBS Vickers
SGX Stock
Analyst Report
3.30
Same
3.30
