M1 Ltd - RHB Invest 2016-12-23: Resetting Expectations

M1 Ltd - RHB Invest 2016-12-23: Resetting Expectations M1 LIMITED B2F.SI

M1 Ltd - Resetting Expectations

  • We cut FY18/19 core earnings forecasts further to factor in higher risks from a potentially disruptive but likely rational new entrant, TPG Telecom (TPG). 
  • M1 exhibited the largest revenue/EBITDA share decline over the past two years and has the biggest exposure to the domestic market with a lack of bundling opportunity to mitigate subscriber churn. 
  • Our DCF based TP is lowered to SGD2.05 (from SGD2.55, 5% upside). 
  • Maintain NEUTRAL as the stock’s risk-reward is more balanced now following the sharp sell-down with a 7% prospective dividend yield.

Downwardly mobile. 

  • M1 is highly susceptible to revenue and EBITDA pressure from the budding fourth mobile entrant, TPG Telecom (TPG) as the mobile segment makes up 80% and an estimated 70% of the group’s 9MFY16 service revenue and EBITDA respectively. 
  • M1’s bigger exposure to the more price sensitive segment of the market could see revenue pressure intensify from FY18 as TPG introduces attractively priced and innovative plans in the market. 
  • Already, the on-going competition in the market (from Singtel and StarHub) and structural roaming revenue pressure in the industry have contributed to above industry average decline in mobile revenue of 7% YoY in 3Q16 (9M16: -4% YoY) as blended ARPU plunged 10% in 3Q16 (9MFY16: -7% YoY). 
  • M1 posted the largest decline in revenue and EBITDA share in the industry over the past two years of 1ppts and 2.1 ppts respectively.

Forecast revision. 

  • We cut our FY18/19 core earnings forecasts by a further 10.1%/16.8% after building in stronger ARPU dilution of 20-23% (vs. 15-20% previously) and margin pressure from greater retention activities. 
  • M1 had earlier downgraded FY16 earnings guidance (the second consecutive quarter of downgrade) post the release of its 3Q16 results with full year earnings set to contract by ‘low to mid-teens’ vs. ‘single digit decline’ previously. 
  • We note M1’s focus on smart nation projects, cloud computing and internet of things (IoT) would mitigate pressure on revenue and earnings in the medium to longer-term.

Still resonating M&As. 

  • The telco has been the subject of M&A talks in the market over the past year. This stemmed largely from potential corporate exercises involving its two major shareholders – Keppel Telecoms and Axiata Group (AXIATA MK, NEUTRAL, TP: MYR4.70) which respectively holds 19.5% and 28.2% stake in the company. Axiata was previously reported to be keen on upping its stake in M1 but management had denied talks of any negotiations.

Share price at multi-year lows. 

  • Our DCF based TP (WACC: 8.5%, TG: 1.5%) is lowered to SGD2.05 (from SGD2.55) following the earnings downgrade. 
  • Following the sharp 28% sell-down on the stock YTD, M1 trades at -1 SD to its 5-year historical EV/EBITDA mean of 8.5x with share price supported by prospective dividend yields of over 7%. 
  • Key risks to our forecast and TP are: 
    1. Stronger than expected competition from TPG; 
    2. Higher than expected capex and; 
    3. Further dilution in data yields.

Singapore Research Team RHB Invest | http://www.rhbinvest.com.sg/ 2016-12-23
RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 2.05 Down 2.550