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

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.

Resetting expectations. 

  • 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.

Data users increasingly discerning. 

  • 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.

Maintain NEUTRAL. 

  • 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