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


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