M1 - DBS Research 2016-07-18: Non-cash items hurt bottom line, solid cash generation

M1 - DBS Research 2016-07-18: Non-cash items hurt bottom line, solid cash generation 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: 
    1. The lack of a domestic roaming agreement in Singapore, as we are not aware of any success story globally without roaming in place; 
    2. Incumbents showing their willingness to defend their subscriber bases even at the cost of future profitability, by cutting data prices sharply and 
    3. 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.


  • 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 BUY Maintain BUY 3.30 Same 3.30