M1 Limited - CIMB Research 2017-01-25: 4Q16 Underwhelming performance

M1 LIMITED B2F.SI

M1 Limited - 4Q16 Underwhelming performance

FY16 core EPS fell by a steep 17.9% yoy. Results were below expectations due to higher-than-expected opex, depreciation and effective tax rate.
Mobile service revenue continued to decline yoy in 4Q16 due to lower postpaid roaming revenue. Fixed services revenue was the bright spot, up 10.1% yoy.
EBITDA margin fell for a third consecutive quarter in 4Q16, down 5.9% pts yoy due to softer mobile service revenue and higher opex.

We cut FY17-18F core EPS by 7-10% and factor in a 21% capex jump in FY17F.
Downgrade to Reduce on 5% lower target price of S$1.80. A potential de-rating catalyst is the 10.9% 3-year CAGR decline in core EPS in FY17F-19F.

EBITDA tumbled 17.7% yoy (-3.7% qoq) in 4Q16 due to lower mobile revenue and higher opex.
Core EPS was down by a steeper 36.5% yoy (-19.3% qoq) due to higher depreciation and effective tax rate.
For FY16, core EPS fell 17.9% yoy. This was below expectations, coming in 6.9%/7.4% lower vs. our/consensus forecasts. The key variance was higher-than-expected opex, depreciation and effective tax rate.
Final DPS was 5.9 Scts, bringing FY16 DPS to 12.9 Scts, based on an 80% payout ratio.

Mobile service revenue (64% of total) continued to decline by 5.9% yoy (+2.1% qoq) in 4Q16, largely due to a 4.8% yoy decline (+3.2% yoy) in postpaid as roaming usage fell.
This was partially buffered by growing data revenues, as subs exceeding their data bundles grew to 28% (4Q15: 25%, 3Q16: 26%). Meanwhile, fixed services revenue (9% of total) grew by a decent 10.1% yoy but was largely flat qoq. Despite sustained high net adds (8k qoq to 160k subs), ARPU fell sharply 5.7% qoq due to year-end promos.

EBITDA margin on service revenue fell for a third consecutive quarter, down 5.9% pts yoy (-2.1% pts qoq) to 35.0% in 4Q16, mainly due to higher traffic, network maintenance and project accrual costs.
Under EBITDA, depreciation and amortisation rose 3.4% yoy (+4.7% qoq) in 4Q16 on a higher fixed asset base.
Net debt/EBITDA increased to 1.4x (3Q16: 1.3x) due to lower EBITDA (last quarter annualised).

We cut our FY17-18F core EPS by 7.2-9.6%, which factors in lower EBITDA margin, plus higher depreciation and interest expense due to a 21% jump in capex to S$170m (in line with M1’s guidance).
Included in the higher FY17F capex are one-off investments for NB-IOT network upgrades, data analytics and ICT-related projects, which we assume will normalise to S$140m in FY18.
From FY19 onwards, we factor in 20% capex savings from M1’s network sharing with StarHub.

We downgrade M1 from Hold to Reduce.
DCF-based target price cut by 5.3% to S$1.80 (WACC: 7.1%), post-earnings revision and after factoring in 20% capex savings from network sharing with StarHub (FY19 onwards).
M1’s 14.8x FY17F EV/OpFCF is roughly in line with ASEAN telcos, which we think is unjustified given future earnings risk. A good entry point would be below S$1.48 (bear case) and exit point above S$2.11 (bull case).
Upside/downside risks are better/worse-than-expected impact of TPG’s entry.

FOONG Choong Chen CFA CIMB Research | http://research.itradecimb.com/ 2017-01-25

CIMB Research SGX Stock Analyst Report REDUCE Downgrade HOLD 1.80 Down 1.900