M1 - DBS Research 2016-08-22: Wait for clarity

M1 - DBS Vickers 2016-08-22: Wait for clarity M1 LIMITED B2F.SI

M1 - Wait for clarity


StarHub has launched aggressive mobile-fixed broadband plans. 

  • This shows that the risk of a new entrant is not off yet.
  • This also leads to 3%/4% cut in our FY17F/18F earnings for M1 as it may be forced to react. M1 has returned 16% to its shareholders since our upgrade on 3 June 2016. 
  • Investors will be better off 
    1. buying M1 if new player is ruled out in October, or 
    2. accumulating M1 on weakness if a new player enters as the actual adverse impact on M1’s earnings will be ~20% in the long term.


2Q16 net profit of S$ 41.0m (-13% y-o-y, -7% q-o-q) was 3% below our expectations. 

  • Accrued handset revenue decreased ~S$12m in 2Q16 to S$74 m from S$86m in 1Q16 due to lower iPhone sales. As M1 uses fair value accounting for iPhone sales, this has had an adverse impact on revenue and profits. However, this impact is non-cash in nature. 
  • M1 downgraded its official guidance from stable net profits to a single-digit decline in FY16.


Mobile may decline while fixed line may continue to grow. 

  • We see double-digit growth for fixed broadband segment (12- 13% of total revenue) which may not be enough to offset the overall decline in group revenue. 
  • M1 is the only Singapore telco to use fair value accounting for iPhones which is likely to hit the profit over the next 2-3 years in the face of slowing iPhones sales.

Valuation

  • Downgrade M1 to HOLD with a revised TP of S$2.85 as we assume 50% probability of a new entrant. 
  • Our TP of S$2.85 is the average of our TP of S$3.10 (no new entrant scenario) and TP of S$2.60 (confirmed new entrant scenario).

Key Risks to Our View

  • Upside and downside risks. A well-funded new entrant could lead to our bear-case TP of S$2.15 while the non-entry of a new player could lead to our bull-case TP of S$3.15.




Sachin Mittal DBS Vickers | http://www.dbsvickers.com/ 2016-08-22
DBS Vickers SGX Stock Analyst Report HOLD Downgrade BUY 2.85 Down 3.300


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