M1 - DBS Research 2017-04-18: Mobile ARPUs Continue To Decline

M1 LIMITED B2F.SI

M1 - Mobile ARPUs continue to decline

1Q17 service revenue holds up, net profit of S$36.3m in line with expectations.
Growth in fibre customer base offsets decline in mobile revenues.
Potential sale of major shareholders’ 61% stake in M1 lends near term support to share price.

1Q17’s net profit of S$36.3m (+14.2% q-o-q, - 14.6% y-o-y) includes a S$2.4m gain on disposal of fixed assets and is in line with our expectations as service revenue held up amidst continued growth in fixed service revenue (+10.3% q-o-q, +22.4% y-o-y) which was offset by declines in mobile revenue (-0.5% q-o-q, -3.5% y-o-y) and international call services revenue (-10.3% q-o-q, -10.9% y-oy).
Mobile revenues continue to be impacted by the contraction of voice and roaming revenues while higher data allowances have affected mobile data revenue growth.
Higher wholesale cost of fixed services, staff costs and depreciation continue to drive increase in costs.

Having added net 32k fibre customers through FY2016, we continue to see healthy growth in M1’s fibre customer base, which grew by another 8k in 1Q17 to 168k. Increase in fibre customer base mostly arose from residential customers, as well as major government contracts secured.
Fibre broadband APRU held up at S$43.4 (+0.7% q-o-q, -7.6%% y-o-y) as M1 continues to attract new customers in the aggressive fixed line market.

Postpaid mobile revenues were flat as the increase in customer base driven by increase in SIM-only and Circles.Life customers offset the decline in gross APRU (S$55.8; -2.3% q-o-q). Prepaid mobile revenues continued to decline owing to decline in APRU (S$11.0, -4.5% q-o-q).
We continue to expect pressures in mobile APRU going forward owing to the impending entry of the fourth mobile player, TPG.

Although M1 did not secure the 2.5GHz spectrum in the recently concluded General Spectrum Auction, M1 sees small cell/ WiFI HetNet deployment as an alternative to costly spectrum in delivering data experience.
Deployment of small cell networks in targeted locations would be done progressively.

M1 has announced its intentions to drive growth in the Government and Corporate segments, by offering cloud-based service offerings. We continue to watch this space but do not expect any material contributions in the near term.

Our DCF-based (WACC 6.3%, terminal growth 0.3%) TP for M1 is S$1.97.
In the scenario of a possible takeover, we believe the takeover premium could range between 10-35% over last close before announcement (based on data of previous buyouts and privatisations for SGX-listed companies), which implies a transaction price range of between S$2.23-2.74 per share.

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$2.32 for M1.

Suvro SARKAR DBS Vickers | Singapore Research Team DBS Vickers | Sachin MITTAL DBS Vickers | http://www.dbsvickers.com/ 2017-04-18

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