M1 Limited - CIMB Research 2016-07-17: Uninspiring 2Q16

M1 LIMITED B2F.SI

M1 Limited - Uninspiring 2Q16

Maintain Hold. Target price raised by 17% to S$2.80 to factor in the possibility that a fourth mobile operator may not materialise.

EBITDA fell by 3.7% yoy (-2.9% qoq) in 2Q16 due to higher opex.
Core net profit was down by a bigger 8.3% yoy (-3.7% qoq) due to higher depreciation and amortisation.
Results were slightly below expectations, with 1H16 coming in at 47%/47% of our/consensus estimates (1H14: 49%, 1H15: 51%,).
M1 has cut its FY16 net profit guidance to a single-digit decline from stable previously due to higher cost from its digital investments.
As expected, DPS of 7.0 Scts was declared (2Q15: 7.0 Scts).

Mobile service revenue (80% of total) fell 2.2% yoy (-0.2% qoq) in 2Q16. Both postpaid (-1.6% yoy) and prepaid (-6.7% yoy) revenue fell due to lower roaming, IDD and Voice usage, despite an expanding subs base.
Fixed services revenue (13% of total) grew by a strong 27.4% yoy but saw modest growth sequentially (+4.5% qoq) for the second consecutive quarter.
Fibre customers grew 9k qoq to 145k but ARPU slid 3.8% qoq due to the take-up of mass residential fibre plans.

EBITDA margin on service revenue fell 1.5% pts yoy (-1.3% pts qoq) to 39.5% in 2Q16, due to higher A&P, bad debts and G&A costs. Beneath EBITDA, depreciation and amortisation rose 8.7% yoy (+2.6% qoq) in 2Q16 (1H16: +10.4%) due to M1’s investment in new technology and digital solutions.
M1 said the cost of these new investments are being recognised upfront, while any benefits will only be realised in 2-3 years’ time once greater scale is achieved.

We cut our FY16-18F core EPS by 4.4%/1.6%/5.9% to factor in lower service revenue, higher opex and depreciation and amortisation.
We now see core EPS dropping 4.5% in FY16F, growing 2.7% in FY17F, then falling by 16.7% in FY18F, impacted by competition with the entry of a fourth mobile operator.
Based on an 80% payout ratio, our FY16/17/18F DPS forecasts are now lower at 14.6/15.0/12.5 Scts (previously 15.2/15.2/13.3 Scts).

We raise our target price by 16.7% to S$2.80 in light of recent market talk that potential bidders for the fourth mobile license may not be able to raise sufficient funding for the spectrum auction. This is based on the mid-point between our DCF-based fair value in the scenario of a fourth mobile player entering the market (S$2.40) and status quo (S$3.20), as we are unable to rule out either outcome for now.
Maintain Hold.
Key upside/downside risk is the non-entry/emergence of a fourth mobile operator.

FOONG Choong Chen CFA CIMB Securities | http://research.itradecimb.com/ 2016-07-17

CIMB Securities SGX Stock Analyst Report HOLD MAINTAIN HOLD 2.80 Up 2.40