M1 (M1 SP) - Maybank Kim Eng 2017-01-25: More Difficult Years Ahead

M1 LIMITED B2F.SI

M1 (M1 SP) - More Difficult Years Ahead

We maintain our SELL call on M1. FY16 results were below expectations and competition is expected to intensify in FY17.
In addition, capex is now guided to soar by another 21% to SGD170m in FY17.
Our DCF-based TP dips 3% to SGD1.85 as we trim our FY17-18 earnings forecasts by 8-9%.
Dividend policy of 80% of profits stays for now, but longer-term forecasts of a 13.5% drop in NP in FY16-19 means a shrinking dividend as well.

Lastly, spectrum cost beyond our assumption of SGD105m in the upcoming auction could lead to further downside risk for the stock.

FY16 NP fell 16% YoY to SGD150m, c.5% below already-lowered expectations.
Postpaid revenue continued to weaken (-4.6%/-3.6% YoY in 4Q16/FY16) due to lower roaming (8-10% of sales in 4Q16, down from 10% in 4Q15) and IDD usage as the OTT switch deepened.
Data usage was strong rise (up to 54% of service revenue in FY16, from 46% in FY15), but no visible impact on revenue or margins.
Service mobile revenue fell 2.1% (-1% in FY15) and EBITDA margin declined to 38.7% (FY15: 41.6%).

M1 expects competition to heat up in FY17 as the industry prepares for TPG’s (TPM AU, NR) entry.
We lowered our FY17/18 earnings forecasts by 8.4%/9% as we assumed higher depreciation, marketing and staffing costs.
M1 has firmed up additional investments in new technologies, such as 4.5G/5G, HetNet and NarrowBand IoT. Earnings will be diluted until they can achieve scale. As a result, FY17 capex is expected to rise from an-already high SGD140m (13% of sales) to SGD170m (17% of sales).

M1 has announced open collaboration with StarHub (STH SP, HOLD, TP SGD3.52) to share active access elements of the mobile network as well as passive infrastructure. However, management is still unable to define the extent of benefits this could bring to capex/opex.
Proposals and implementation could take 18-24 months to execute. If successful, lower industry costs could hinder TPG’s efforts to gain market share (8.6% revenue share expected by 2022).
But until this clears up, M1 is still a SELL with DCF-based TP of SGD1.85 on 5.5% WACC and 0% LTG.

No new competitor to take up a new mobile operator licence. The three incumbents keep their spectrum allocations, including bands reserved for fourth telco.
Formulation of ways to differentiate itself permanently, easing marginalisation concerns.

M1’s spectrum allocation is reduced if fourth telco emerges and takes up its full reserve.
Unable to maintain 80% payouts if it needs to pay more for spectrum or network investments.
Subscriber churns if users decide they need more than mobile and broadband.

Gregory Yap Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-01-25

Maybank Kim Eng SGX Stock Analyst Report SELL Maintain SELL 1.85 Down 1.900