M1 - Maybank Kim Eng 2016-10-19: Pressures mounting

M1 LIMITED B2F.SI

M1 (M1 SP) - Pressures mounting

Maintain SELL on M1. 3Q16 results were below expectations.
We further lower already-reduced FY16-18E by 6-14% and DCF-based TP by 7% from SGD2.04 to SGD1.90.
The biggest concern was the much sharper fall in postpaid revenue of 6% YoY vs 1-2% in the past few quarters, even before new rivals have a chance to make an appearance.

As it stands, M1 already has the most to lose due to its purely Singapore AND mostly mobile focus (mobile accounts for 80-82% of total service revenue).

3Q/9M16 NP fell 23%/13% YoY and accounts for 70% of FY16E, which already built in a 6% fall (we revise down by a further 6%, post-results).
Decline in postpaid revenue accelerated to 6% YoY from low single-digit previously, which management attributed to lower roaming (which has not found a floor yet) and more worryingly, a decline in adhoc excess usage revenue, which was not compensated for by recurring revenue.

IMDA’s decision on which of the three applicants will be qualified to bid in the NESA (New Entrant Spectrum Auction) has been delayed a month till end-Oct. Our bets are on MyRepublic and TPG (TPM AU; Not-rated).
Spectrum prices, if chased up by the new entrant/s, could stretch M1’s balance sheet further. Its net debt/EBITDA of 1.2x is already the highest in the sector. While M1 maintains its 80% dividend payout guidance, DPS is expected to dip along with falling profits.

M1 stands to lose the most from a new competitor due to its purely Singapore AND mostly mobile focus (mobile accounts for 80-82% of total service revenue, with the most vulnerable prepaid segment comprising c.40% of its subscriber mix).
The winner is obliged to roll out nationwide outdoor coverage by 30 Sep 2018, road tunnels and in-building by 30 Sep 2019, and underground MRT stations and lines by 30 Sep 2021.

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.

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/ 2016-10-19

Maybank Kim Eng SGX Stock Analyst Report SELL Maintain SELL 1.90 Down 2.040