M1 LIMITED
B2F.SI
M1 (M1 SP) - 2Q16: Steep Contraction In Traditional Voice & SMS Services Revenue
- Mobile revenue contracted 2.2% yoy due to a steep decline in voice & SMS revenue.
- Pre-paid ARPU also contracted by a severe 17.4% yoy.
- Handset subsidies expanded S$1.3m qoq due to the full impact from Samsung Galaxy S7.
- ARPU for fibre broadband drifted lower by 3.8% qoq as new sign-ups were for residential fibre broadband rather than enterprise customers.
- Management has downgraded their outlook to a single-digit decline for full-year net profit.
- Maintain SELL due to concerns over entry of a fourth mobile operator. Target price: S$2.00.
RESULTS
- M1 reported net profit of S$41m for 2Q16, below our expectations of S$44.7m.
Mobile: Voice & SMS impacted by cannibalisation.
- M1 added 14,000 post-paid subscribers and 24,000 pre-paid subscribers. However, post-paid ARPU declined by 3.5% yoy to S$59.90 due to dilutive impact from increased take-up for SIM-only plans and shared plans and lower roaming revenue. Pre-paid ARPU declined 17.4% yoy to S$12.30 due to lower usage for voice and iDD.
- Average usage of data increased by only a mere 3% yoy to 3.3GB/month. Data contributed 54% of mobile service revenue, and data revenue expanded by a strong 17.6% yoy. However, we estimated that revenue from traditional voice & SMS contracted 18.3% yoy due to cannibalisation by data and over-the-top (OTT) messaging apps.
- Negative impact from handset subsidies. Handset subsidies increased by S$1.3m qoq to S$23.5m due to the shift in mix of handsets towards Android-based smartphones where handset subsidies are expensed off upfront. The launch of Samsung Galaxy S7 in March was reasonably well received and had its full impact in 2Q16.
Losing momentum on the enterprise front.
- M1 added 9,000 fibre broadband subscribers due to take-up for residential fibre broadband plans. ARPU eased 3.8% qoq to S$45.10, the second consecutive quarter of sequential decline, due to higher proportion of take-up from the residential market.
Decline in international calls.
- Revenue from international call services declined by 21.2% to S$15.3m due to lower volume of iDD calls to Bangladesh and India. International retail minutes contracted 21.2% yoy to 162m minutes.
Stable EBITDA margin.
- EBITDA margin was stable at 40.3%. Management imposed cost discipline and reduced staff costs by 2.6% yoy. Depreciation increased by 7% yoy to S$27.5m. Net profit declined by 7.5% yoy.
- M1 has preserved a strong balance sheet with net debt/EBITDA at 1x.
STOCK IMPACT
Revised guidance for 2016.
- M1 has downgraded its 2016 guidance from "stable performance" to "single-digit decline for net profit".
- Management explained that M1 would be investing in new technologies and capabilities to build a portfolio of IT solutions for SMEs and enterprise customers. These efforts incur expenditure upfront and would have a dilutive impact on EBITDA margin. It would take a couple of years before M1 achieves scale in service adoption and the new business makes meaningful contribution to revenue.
- M1 has declared an interim dividend of 7 S cents/share.
No progress in Oman.
- M1 has previously entered into an agreement to invest S$10m for a 15% stake in Telecom Oman (TeO). TeO is an international gateway operator and a mobile services reseller (mobile virtual network operator or MVNO) in the Sultanate of Oman. TeO could evolve to become the third mobile operator in Oman.
- We understand that conditions precedent were not fulfilled and management has decided not to proceed to invest in TeO.
Hosting Liberty Wireless’ Circles.Life.
- M1 has entered into an agreement to provide voice, SMS and data services on a wholesale basis to Liberty Wireless, a mobile virtual network operator (MNVO). Liberty Wireless operates under the Circles.Life brand.
- Circles.Life had its soft launch on 5 May and was then available to all customers on 28 June. Management disclosed that Circles.Life had achieved good initial take-up.
EARNINGS REVISION/RISK
- We cut our net profit forecast for 2016 by 8.5% and for 2017 by 12.6% to factor in poorer performance in 1H16 and the revised guidance.
VALUATION/RECOMMENDATION
- Maintain SELL. Our worst-case valuation is S$2.00 compared with our best-case valuation of S$3.55.
- We have conservatively set our target price at S$2.00 as we are concerned that MyRepublic or ConsisTel/OMGtel might just scrape through to become the fourth mobile operator in Singapore.
SHARE PRICE CATALYST
- M1’s dividend yield has eased to 4.8%.
- Confirmation on whether Singapore will have a fourth mobile operators.
Jonathan Koh CFA
UOB Kay Hian
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http://research.uobkayhian.com/
2016-07-18
UOB Kay Hian
SGX Stock
Analyst Report
2.00
Down
2.14
