M1 Limited - CIMB Research 2017-04-18: 1Q17 No Reason To Get Excited

M1 Limited - CIMB Research 2017-04-18: 1Q17 No reason to get excited M1 LIMITED B2F.SI

M1 Limited - 1Q17 No reason to get excited

  • 1Q17 results in-line. Core EPS at 25%/25% of our/consensus FY17 forecasts.
  • Mobile service revenue fell by 3.5% yoy (-0.5% qoq) in 1Q17. Fixed services revenue continued to shine, up 22.4% yoy (+10.3% qoq).
  • EBITDA margin fell by 3.1% pts yoy (+2.7% pts qoq) in 1Q17 due to higher costs.
  • We cut FY19F core EPS by 3.4% to factor in the high price of the 700MHz licence.
  • Maintain Reduce with a 6% lower DCF-based target price of S$1.70. A potential derating catalyst is the 11.9% 3-year CAGR decline in core EPS in FY17F-19F.

1Q17 results were in line with expectations 

  • EBITDA fell by a milder 8.6% yoy in 1Q17 due to lower service revenue and higher opex. 1Q17 core EPS declined by a steeper 19.5% yoy due to higher depreciation, net interest cost and effective tax rate. 
  • Qoq, EBITDA/core EPS rose 7.8%/23.9%, mainly due to lower costs, some of which are seasonal (e.g. A&P, handset subsidies). 
  • Overall, 1Q17 core EPS was in line, coming in at 24.7%/24.7% of our/consensus FY17 forecasts. As usual, no dividends were declared in 1Q17.

Mobile revenue fell yoy; fixed services offer some hope 

  • Mobile service revenue (78% of total) fell by 3.5% yoy (-0.5% qoq) in 1Q17. 
  • Postpaid revenue fell by 1.7% yoy (flat qoq) due to a greater take-up of sim-only plans and lower roaming, while prepaid revenue dropped 18.2% yoy (-5.6% qoq) on lower voice traffic, despite an expanding subs base for both segments. 
  • Fixed services revenue (15% of total) grew by a stronger 22.4% yoy (+10.3% qoq) in 1Q17 on a higher customer base and larger contributions from government projects that were secured at end-2016.

EBITDA margin down 3% pts yoy 

  • EBITDA margin on service revenue was down 3.1% pts yoy to 37.6% in 1Q17. This was mainly due to higher wholesale, staff and other costs on slightly lower service revenue.
  • Qoq, margin was up 2.7% pts due to seasonally lower A&P and handset subsidies, while facilities and other cost of sales also fell. 
  • Under EBITDA, depreciation and amortisation rose by 4.6% yoy (-5.1% qoq) in 1Q17 on a higher fixed asset base. 
  • Net debt/EBITDA decreased to 1.2x (4Q16: 1.4x) due to higher EBITDA (last quarter annualised).

FY19F core EPS cut by 3% due to high 700MHz spectrum price 

  • FY17F-18F core EPS is raised by 1.6%-2.5% as we have: 
    1. removed the cash outflow and amortisation that we had previously factored in for the 2500MHz spectrum, as M1 did not win any in the recent general spectrum auction and 
    2. lowered FY17F capex to S$150m from S$170m, in line with M1’s latest guidance. 
  • However, we cut FY19F core EPS by 3.4% due to higher amortisation and interest cost, arising from the high price of S$188m for the 700MHz (2x10MHz) spectrum, which is likely to be paid in 2H18.

Maintain Reduce with a 6% lower DCF-based target price of S$1.70 

  • Factoring in the higher-than-expected spectrum payments, we lower our DCF-based target price by 5.6% to S$1.70 (WACC: 7.1%) and maintain our Reduce rating. 
  • M1’s 13.9x FY17F EV/OpFCF is at a 23% discount to ASEAN telcos, which we think is justified given its future earnings risk. 
  • A good entry point would be below S$1.38 (bear case) and exit point above S$2.01 (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/ 2017-04-18
CIMB Research SGX Stock Analyst Report REDUCE Maintain REDUCE 1.700 Down 1.800