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

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.



Pressure points still. 

  • 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.


Moving up digitally. 

  • 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%.


Forecast and risks. 

  • 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.


Downgrade to NEUTRAL. 

  • 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


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