M1 Limited - CIMB Research 2016-10-18: 3Q16 ~ A topline problem

M1 LIMITED B2F.SI

M1 Limited - 3Q16 ~ A topline problem

EBITDA tumbled 13.0% yoy (-9.3% qoq) in 3Q16 due to lower mobile revenue and higher handset subsidies. Core net profit was down by a steeper 21.8% yoy (-16.8% qoq) due to higher depreciation and amortisation. Results were below expectations, with 9M16 coming in at 69%/69% of our/consensus estimates (9M14: 75%, 9M15: 75%).
Post the weak 3Q16 results, M1 cut its FY16 guidance, with net profit expected to fall by 12-13% from a single-digit decline previously.

Mobile service revenue (79% of total) declined 6.6% yoy (-4.8% qoq) in 3Q16, largely due to postpaid (-6.1% yoy, -5.0% qoq). Excess data usage revenues fell as subs exceeding their data bundles eased to 17% (2Q16: 21%). Mobile revenue was also hurt by the continued decline in roaming revenue and higher take-up of sim-only plans.
Fixed services revenue (14% of total) rose a strong 25.0% yoy but saw more modest 5.5% growth qoq. Fibre customers grew 7k qoq to 152k and ARPU increased 1.3% qoq.

EBITDA margin on service revenue fell for a second consecutive quarter by 4.0% pts yoy (-2.4% pts qoq) to 37.0% in 3Q16, mainly due to softer mobile revenue and higher handset subsidies.
Beneath EBITDA, depreciation and amortisation rose 4.2% yoy (+2.6% qoq) in 3Q16 on a higher fixed asset base.
Net debt/EBITDA increased to 1.3x (2Q16:1.0x) due to a one-time spectrum payment of S$64m in Sep 2016 and lower last quarter annualised EBITDA.

We cut our FY16F/17F/18F core EPS by 9.6%/8.3%/9.4% mainly to factor in lower mobile service revenue.
We now see core EPS dropping 13.9% in FY16F, growing 4.3% in FY17F, then falling by 17.7% in FY18F, impacted by competition with the entry of a fourth mobile operator.
Based on an 80% payout ratio, our FY16F/17F/18F DPS forecasts are now lower at 13.2/13.7/11.3 Scts (previously 14.6/15.0/12.5 Scts).

We cut our DCF-based target price by 8.9% to S$2.55 and keep our Hold rating, given the uncertainty regarding the possible entry of a fourth mobile player.
Our DCF target price is set at the mid-point between the scenario of a fourth mobile player entering the market (S$2.10) and status quo (S$3.00), though we believe the former scenario is more likely.
M1’s 12.9x FY17F EV/OpFCF is at a 10% discount to ASEAN telcos.
Key upside/downside risks are the non-entry/emergence of a fourth mobile operator.

FOONG Choong Chen CFA CIMB Research | http://research.itradecimb.com/ 2016-10-18

CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 2.55 Down 2.800