M1 - CIMB Research 2017-07-19: 2Q17 EBITDA Dragged Down By Higher SAC

M1 - CIMB Research 2017-07-19: 2Q17 EBITDA Dragged Down By Higher SAC M1 LIMITED B2F.SI

M1 - 2Q17 EBITDA Dragged Down By Higher SAC

  • M1's 2Q17 results in line. 1H17 core EPS at 47%/48% of our/consensus FY17 forecasts.
  • EBITDA fell 9.1% yoy due to a rise in subscriber acquisition cost (SAC) on higher recontracting activities.
  • Maintain Reduce, with an unchanged DCF-based target price of S$1.70.

2Q17 results largely in line with expectations

  • 2Q17 EBITDA fell 9.1% yoy (-3.4% qoq) on higher opex, while service revenue was flat. 2Q17 core EPS declined by a steeper 20.9% yoy (-4.9% qoq) due to higher depreciation, net interest cost and effective tax rate.
  • Overall, 1H17 EBITDA/core EPS came in within expectations at 49%/47% of our FY17 forecasts (consensus: 48%/48%). 
  • A DPS of 5.2 Scts was declared (2Q16: 7.0 Scts), implying a 70% payout. M1 has also guided for a decline in FY17 net profit after tax.

Mobile revenue continues to ease yoy, but at a slower pace

  • Mobile service revenue (78% of total) continued to ease by 2.1% yoy (+1.2% qoq) in 2Q17, albeit at a slower pace. This was largely driven by prepaid revenue which fell 15.0% yoy (flat qoq) as ARPU dipped 14.6% yoy (-4.5% qoq) from lower voice traffic.
  • Postpaid revenue dropped a milder 0.6% yoy (+1.4% qoq) as the expansion in subs base (+3.7% yoy) partly offset the 6.8% decline in ARPU. Postpaid subs fell marginally at 0.3% qoq mainly due to the migration of 2G customers to M1’s machine-to-machine (M2M) platform following the 2G network shutdown in Apr.

Fixed services still going strong

  • Fixed services revenue (15% of total) continued to grow at 21.5% yoy (+3.7% qoq) in 2Q17 on a higher fibre customer base and larger contributions from government projects that were secured at end-2016.

EBITDA margin down by a further 4% pts yoy on higher SAC

  • EBITDA margin on service revenue fell by a further 3.7% pts yoy (1.8% pts qoq) to 35.8% in 2Q17, mainly due to 
    1. increased subscriber acquisition cost (SAC) on higher re-contracting activities, especially on higher-end plans, and 
    2. higher fixed services contribution in the revenue mix.
  • Net debt/EBITDA rose to 1.4x (1Q17: 1.2x) after spectrum payments in Jun 17.

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

  • Maintain Reduce with an unchanged DCF-based target price of S$1.70 (WACC: 7.1%). 
  • M1’s 13.7x FY17F EV/OpFCF is at a 21% 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.
  • We believe M1’s share price could see some weakness today after its three major shareholders announced that they will not proceed to sell their stakes, as the proposals received did not meet the minimum criteria. M1’s share price was at S$1.97 (16 Mar), prior to their announcement on 17 Mar of a strategic review exercise.

FOONG Choong Chen CFA CIMB Research | http://research.itradecimb.com/ 2017-07-19
CIMB Research SGX Stock Analyst Report REDUCE Maintain REDUCE 1.700 Same 1.700