M1 - RHB Invest 2016-10-19: Another Missed Call

M1 LIMITED B2F.SI

M1 - Another Missed Call

M1 disappointed for the second consecutive quarter as the contraction in mobile service revenue surprisingly deepened. EBITDA also skimmed by higher handset cost and opex.
We retain our NEUTRAL rating ahead of the spectrum auction and revelation of the names of pre-qualified candidates by month-end.
We note that M1’s share price has already been bashed down significantly over the past 12 months.

With the downward earnings revision for FY16F-18F, our DCF-based TP is lowered to SGD2.55 (from SGD3.02, 9% upside).
Earnings prospects remain unexciting.

M1 now expects its FY16 core earnings to decline within the YTD range (9M16: -12% YoY) from the earlier guidance of a ‘single digit decline’ – its second consecutive quarter of earnings downgrade.
We cut our core earnings forecasts for FY16-18 by 10.3%, 12.7% and 8.1% respectively, having re-assessed our mobile revenue assumptions and margin expectations.
We now forecast a larger 15% YoY drop in FY16 core earnings, from -5% previously, with FY18F earnings set to contract by 7.4% (factoring in fourth operator risks).
Key risks to earnings are:
1. Stronger-than-expected competition (from the entry of a fourth mobile operator in 2017);
2. Higher-than-expected capex;
3. Further dilution in data yields.

M1 said the steep decline in mobile 2.9 service revenue in 3Q16 (-4.8% QoQ, -6.6% YoY) was due to the more cautious data usage by subscribers (resulting in lower excess data charges).
The acceleration in mobile revenue contraction of -6% YoY in 3Q16 (-2.2% in 2Q16) was the largest since FY09.
A continuation of the underlying trend may signify a structural change in data consumption behaviour and potentially impede effective data monetisation plans, in our view.

Our DCF TP (WACC: 8.5%, TG: 1.5%) is lowered to SGD2.55.
M1 trades at 7.9x FY17F EV/EBITDA and 13.8x FY17F EPS, the lowest among local peers with a superior dividend yield of 6.9% for FY16F.
The sharp sell-down on the stock over the past 12 months reflects its sizeable exposure to the domestic mobile market and investors pricing in further earnings downside from a fourth mobile entrant.
We expect share price upside to be capped by the cautious sentiment ahead of the spectrum auction.

Singapore Research Team RHB Invest | http://www.rhbinvest.com.sg/ 2016-10-19

RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 2.55 Same 3.020