M1 - Maybank Kim Eng 2016-09-05: Most at risk | SG Investors.io

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M1 - Maybank Kim Eng 2016-09-05: Most at risk

M1 (M1 SP) - Maybank Kim Eng 2016-09-05: Most at risk

M1 LIMITED B2F.SI

M1 (M1 SP) - Most at risk

M1 likely to be the worst hit, D/G to SELL

We downgrade M1 from HOLD to SELL and slash TP 27% to SGD2.04 following the Expressions of Interest (EOI) for the fourth MNO licence that were put in by three companies instead of the expected two, as well as the appearance of a potentially aggressive competitor in the form of TPG Telecom.

We view M1 as likely to be the most badly affected by new incoming competition due to its pure mobile-only business that will be squarely targeted by the new entrant.
Accordingly, we also cut our earnings estimates for FY17/18 by 3.7%/8.4%.
Our DCF-based TP of SGD2.04 is significantly lowered due to the reduced specific profit forecasts and contracting long-term profits.

Most at risk

If the new entrant auction is held by Oct 2016, according to IDA’s timeline, a licence should be issued and the spectrum sorted out by year-end. The new operator should begin operations by 2H17, but the market is likely to go into aggressive price promotion mode over the next 12-18 months and after the new entrant launches and prices its services.
We expect M1 to be most at risk of losing market share.

Changes in assumptions

We have cut our postpaid net-adds forecast from 15,000 to -5,000 and - 25,000 for FY17 and FY18, while postpaid ARPU is now assumed to fall 5% each in FY17 and FY18 compared to a fall of 1% previously.
In addition, we introduced long-term estimates in our DCF valuation to factor in a likely long-term contraction in M1’s EBITDA given the presence of a new hungry competitor.

Swing Factors

Upside

No new competitor to take up a new mobile operator licence. The three incumbents keep their spectrum allocations, including bands reserved for fourth telco.
Merger with StarHub or formulation of ways to differentiate itself permanently, easing marginalisation concerns.

Downside

M1’s spectrum allocation is reduced if fourth telco emerges and takes up its full reserve.
Unable to maintain 80% payouts if it needs to pay more for spectrum or network investments.
Subscriber churns if users decide they need more than mobile and broadband. Netflix’s entry could tip the scale against M1 due to likely tie-ups with Singtel and StarHub.

Gregory Yap Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-09-05

Maybank Kim Eng SGX Stock Analyst Report SELL Downgrade HOLD 2.040 Down 2.940