M1 (M1 SP) - Maybank Kim Eng 2017-04-05: Post-GSA, Cut TP 5%/DPS 38%

M1 LIMITED B2F.SI

M1 (M1 SP) - Post-GSA, Cut TP 5%/DPS 38%

The IMDA has concluded Phase 1 of the General Spectrum Auction (GSA) after three days of auctions.
Excess demand for 50MHz from the incumbent telcos and newcomer TPG (TPG AU, Not Rated) led to frenzied bidding for the 175MHz of spectrum available and a final price premium of 560% per lot for the non-reserved 900Mhz spectrum, 370% for 700MHz and 297% for 2.5GHz.

To pay for higher-than-expected spectrum cost, M1 needs to lower FY18-19E dividends by 38% to keep gearing levels below the estimated comfort level of 1.8x net debt/EBITDA, with the result that yields will become a pedestrian 3.2% by FY19E.
We lower DCF-TP by 5% to SGD1.75 (WACC 5.5%, LTG 0%). Maintain SELL.

M1 got the 10MHz of 900MHz spectrum that it is entitled to at the reserved price of SGD20m per 2x5MHz lot under the First Right of Refusal. It also bid and won 20MHz of 700MHz spectrum for SGD94m per 2x5MHz lot.
In total, it will pay SGD208m. This is higher than our expected SGD109m. IMDA has not yet made it known when the spectrum has to be paid for.
For our forecasts, we have assumed that the 900MHz and 2.5GHz will be paid this financial year but the 700MHz will be spread equally over FY18- 19 as it will not be immediately available and may not be until 2020 when Singapore, Brunei, Indonesia and Malaysia fully switches over their TV broadcasting from analog to digital.

To pay for the higher-than-expected spectrum cost, M1 needs to lower FY18-19E dividends by 38% to keep gearing levels below the estimated comfort level of 1.8x net debt/EBITDA, with the result that yields will become a pedestrian 3.2% by FY19E.

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/ 2017-04-05

Maybank Kim Eng SGX Stock Analyst Report SELL Maintain SELL 1.750 Down 1.85