M1 - Maybank Kim Eng 2016-07-18: Losing The Wind

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M1 LIMITED B2F.SI 

M1 (M1 SP) Losing The Wind 

2Q16 in line, but guidance lowered 

• 2Q16 results were within our expectation, but its full-year profit growth guidance has been lowered from “stable” to “single-digit decline”. 
• We cut our earnings forecasts and DPS by 5-6% and lower our DCF-based TP 5% to SGD2.94 (WACC 8%, LTG 0.5%). 
• Maintain HOLD as DPS yields are still supportive. 
• Further, if no new bidders emerge for the fourth telco licence, as the market is currently speculating, M1 may get a reprieve as the dark horse. However, if a new MNO is confirmed, the going will get harder for M1. 
• Prefer StarHub (STH SP, TP SGD4.15) for stronger corporate traction and Singtel (ST SP, SGD4.50) for diversification. 

2Q results weren’t stellar 

• 2Q16 service revenue and net profit were within our expectation, with 1H16 at 50%/47% of FY16E. However, it was not a strong 2Q by any means. 
• Service revenue was flat and net profit fell 7% with both postpaid and prepaid revenue fell 1.6% and 6.7%. 
• Fixed services remained the best performing but revenue growth was outstripped by the rise in cost of providing the service. 
• Contributions from Circles Asia helped wholesale revenue to grow 30% YoY but it was within expectations. 

Management’s tone more cautious 

• M1 is lowered its guidance for FY16 net profit to “single-digit decline” as it expects higher depreciation to hinder the previous guidance of a “stable” performance. 
• As capex guidance is still at SGD140m, the only thing that has changed is growth expectations for the corporate solutions business that the bulk of the capex is focused on. 
• M1’s tone for this business has become more cautious, and it now expects revenue to be meaningful only when scale is achieved. 

But DPS yields decent, maintain HOLD 

• We cut our FY16-18 earnings forecasts by 5-6% and DCF-based TP from SGD3.09 to SGD2.94. 
• Given our continued assumption of an 80% payout ratio, DPS forecasts are also cut by 5-6%. 
• Despite the lower DPS, yields are still supportive at c.5%. 
• If no new bidders emerge for the fourth telco licence, as the market is currently speculating, M1 may get a reprieve. However, if a new MNO is confirmed, the going will get significantly harder for M1. 
• Maintain HOLD.

Derrick Heng CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-07-18

Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 2.94 Down 3.09