M1 - OCBC Investment 2016-10-19: 3Q16 earnings missed expectations

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M1 LIMITED B2F.SI

M1 - 3Q16 earnings missed expectations

• Impacted by OTT services.
• Earnings to erode with 4th Telco entry.
• Lower FV on weaker outlook.

Lower handset sales continued into 3Q16 

• M1 Ltd’s (M1) 3Q16 results missed expectations as revenue fell 10.3% YoY to S$249.1m mainly due to lower handset sales (-28.9%) and weaker mobile revenue (-6.6%). 
• Post-paid and pre-paid revenue in 3Q16 fell 6.1% and 10.4% YoY, respectively, as traditional telecommunications services such as international call and roaming continued to be impacted by over-the-top (OTT) services. 
• Coupled with higher depreciation expenses (+4.2% YoY), 3Q16 EBITDA declined 13.9% YoY to S$74.6m and PATMI plunged 23.4% to S$34.4m. 
• For 9M16, revenue dropped 12.0% YoY to S$747.0m, while PATMI fell 12.6% to S$117.9m, meeting just 70.1% of our FY16 forecast.

4th Telco entry a highly probable scenario 

• After three applicants submitted Expression of Interest (EOI) documents for the New Entrant Spectrum Auction (NESA) to Info- communications Development Authority of Singapore (IDA) on 1 Sep, we believe a 4th Telco entry is now a highly probable scenario. 
• Previously, the market had been expecting only two applicants, MyRepublic and OMGTel, to submit EOI to IDA, but Australia-listed TPG Telecom’s (TPG) participation came as a surprise. 
• With fixed broadband track record in Singapore and Australia, as well as ability to fund infrastructure investments, we believe MyRepublic and TPG are likely to receive pre- qualifications from IDA to participate in NESA to become Singapore’s 4th Telco. 
• IDA has yet to announce its decision on whether any of the applicants will pre-qualify for NESA but is expected to do so in 4Q16.

Maintain HOLD with lower FV 

• With a change in analyst coverage, we incorporate assumptions to reflect a 4th Telco entry, which in our view is now a highly probable outcome and cut our FY16F/17F PATMI by 8.2%/8.5%. 
• Consequently, on weaker earnings outlook, we lower our terminal growth assumption from 1% to 0.75% while also updating our other DCF assumptions, which decreases our FV from S$2.79 to S$2.25 (cost of equity: 8%). 
• Maintain HOLD, supported by 6.4% FY16F dividend yield.

Eugene Chua OCBC Investment | http://www.ocbcresearch.com/ 2016-10-19

OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 2.25 Down 2.790