M1 - RHB Research 2016-07-18: Weakening Signals

M1 LIMITED B2F.SI

M1 - Weakening Signals

We downgrade M1 to NEUTRAL from Buy with a revised DCF-based TP of SGD3.02 (from SGD3.20, 9% upside), premised on:
1. The downward earnings revision, with the underlying mobile revenue trend likely to remain weak in 2H16;
2. The 11% re-rating in its share price over the past two weeks on a yield compression theme, which has priced in the mid-term upside;
3. The likely feeble sentiment ahead of the spectrum auction. M1 will be the biggest beneficiary if there is no fourth entrant.

We expect underlying mobile revenue trends to remain relatively weak going into 2HFY16 given the pressure on industry data yields from upsized data packages, heightened competition with the Big-3 operators ramping up retention activities ahead of the potential fourth entrant, and stronger demand for SIM-only plans.
We note that M1’s MVNO customer, Circles Asia which launched its service in early May has upped the ante with “unlimited bonus” data offers on customer referrals.
M1’s mobile service revenue was down 0.2% QoQ (-2.2% YoY) in 2Q16.

We expect the fixed services (enterprise) segment (currently accounting for 10% of revenue) to remain the key growth driver going forward with a projected FY16-18 CAGR of 21%.

M1 guided for a single-digit decline (vs stable previously) in core FY16 earnings due to higher opex/depreciation.
We lower our FY16/17/18 core earnings forecasts by 5%/6.5%/14% after factoring in higher cost assumptions and tempering our revenue growth expectations.
Key earnings risks are stronger than expected EBITDA margin slippage, irrational competition from a new market entrant and higher-than-expected capex.

Our DCF (WACC: 8.5%, TG: 1.5%) TP is lowered to SGD3.00 (from SGD3.20) post earnings revision. The stock’s risk-to-reward favours the upside – as the threat from a fourth entrant remains grossly exaggerated, in our view. That said, the recent run-up on its share price has priced in the mid term upside, with its dividend yield compressed to 5.6%.

Singapore Research RHB Invest | http://www.rhbinvest.com.sg/ 2016-07-18

RHB Invest SGX Stock Analyst Report NEUTRAL Downgrade BUY 3.02 Down 3.20