M1 - DBS Research 2017-01-25: Service revenue contraction to continue | SG Investors.io

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M1 - DBS Research 2017-01-25: Service revenue contraction to continue

M1 - DBS Vickers 2017-01-25: Service revenue contraction to continue

M1 LIMITED B2F.SI

M1 - Service revenue contraction to continue

4Q16 net profit of S$ 31.8m (-27 y-o-y, -8% q-o-q) was below expectations due to lower mobile revenue and higher costs.
Higher accrued handset revenues to have an impact on future revenues.
Maintain HOLD with a revised TP of S$ 1.97.

We project new entrant TPG to gain 8.5% mobile revenue share by 2022.

With an annual EBITDA of A$775m and FY16 (July year-end) net debt-to-EBITDA of 1.6x, TPG has sufficient capital to roll out a nationwide mobile network. Hence, we believe the impact on the incumbents from the entry of TPG to be acute, and project TPG to secure 8.5% revenue share by 2022.
In our bull-case and bear case scenarios for M1, we project TPG to secure 6% and 10% revenue share respectively.

4Q16 net profit 10% below expectations.

4Q16 net profit of S$ 31.8m (-27.1% y-o-y, 7.6% q-o-q) was ~10% below expectations due to lower than expected mobile service revenue and increased cost base.
Contraction of voice, roaming revenues and higher data allowances affected service revenue.
Postpaid acquisition costs rose 23% q-o-q and 10% y-o-y to S$438 per customer while facilities and other costs also rose significantly.

M1 most impacted from the entry of a fourth operator.

We believe the potential entry of a new player will be most felt by M1 due to its higher exposure to mobile revenue and a more price-sensitive subscriber base.
We project M1’s mobile revenue share to contract from 18% at present to 14% in 2022, down from 15% in our previous estimates.
Further, we expect M1’s earnings to contract by 38% by 2022 from 2015 levels, compared to the 31% drop we previously expected.

Valuation

Maintain HOLD with revised TP. Our revised DCF-based (WACC 7.1%, terminal growth 0%) TP is S$1.97 as we reduce FY17F/18F profit estimates. The counter has ~9% downside risk while offering a 5% yield.
Our bull-case and bear case TPs for M1 are S$2.23 and S$1.85 assuming 6% and 10% revenue share for TPG by 2022 respectively

Key Risks to Our View: Limited uptake of TPG’s services.

As an inexperienced operator, TPG could struggle to deploy and maintain a network that could challenge the network quality of M1. Under this bull-case scenario, our TP is S$2.35 for M1.

Sachin MITTAL DBS Vickers | http://www.dbsvickers.com/ 2017-01-25

DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 1.97 Down 2.090