M1 - RHB Invest 2017-07-19: Strategic Review Called Off

M1 - RHB Invest 2017-07-19: Strategic Review Called Off M1 LIMITED B2F.SI

M1 - Strategic Review Called Off

  • M1's 1HFY17 results fell short of RHB’s estimates, though in line with the market. 
  • Key highlights were the good underlying prospects of the fixed/enterprise business, guidance of YoY decline in core FY17 earnings and handset subsidies to remain high. 
  • Separately, its major shareholders have called off the strategic review of their stakes, confirming our earlier view that transaction premiums may have slipped. 
  • Maintain NEUTRAL with DCF TP lowered to SGD1.90 (from SGD2.05, 10% downside) following our downward earnings revision.

Below expectations. 

  • 2Q17 core earnings fell 21% YoY/11% QoQ. This brought 1HFY17 core earnings to SGD68.8m (-18% YoY), at 45% and 49% of our/consensus estimates.
  • The key variances were the higher finance charges (+35% YoY) and handset cost (+20% YoY) in 2Q17, which offset flattish service revenue (+0.3% YoY). 
  • An interim 5.2 sen DPS translates into a 70% payout.

Subscribers (subs) contracted QoQ. 

  • M1’s mobile service revenue (MSR) continues to be impacted by over-the-top (OTT) substitution. MSR fell 2.8% YoY in 1HFY17, driven mainly by the 17% decline in prepaid revenue. 
  • Management expects handset cost to remain high due to stiff competition and re-contracting/retention activities. Its postpaid base contracted 4,000 in 2Q17 as M1 shut down its 2G network and migrated 2G data subs to its machine-to- machine (M2M) platform, which is not part of the subscriber tally.

Fixed services – pillar of strength. 

  • M1 continues to enjoy good billing momentum from multi-year enterprise and public sector jobs (including smart nation projects). This has fuelled the 22% YoY rise in fixed services sales in 2Q/1HFY17. 
  • It expects good opportunities in the longer term from new digital and cloud based solutions and the launch of the nationwide narrowband Internet of Things (IoT) network, which would spawn innovative IoT applications.

Exit plans by shareholders dashed. 

  • M1’s three major shareholders, including Axiata Group (AXIATA MK, NEUTRAL, TP: MYR4.90), have jointly announced that they will not proceed with the strategic review of their stakes in M1, stating that “proposals from interested parties have not met the minimum criteria and parameters”. 
  • The development does not come as a surprise, as we had earlier flagged that the planned divestments may have hit a brick wall due to recent industry developments and the lower transaction premiums accorded.

Forecasts and valuations. 

  • We cut FY17F-19F core earnings by 13.4%,11.7% and 11.9% respectively, factoring in higher subscriber acquisition cost and lower margins going forward with the entry of MyRepublic as a mobile virtual network operator (MVNO) by year-end. This comes on top of 4G newcomer TPG Telecom’s new mobile service in 2018 (impact modelled in). 
  • Maintain NEUTRAL with DCF Target Price lowered to SGD1.90 (WACC: 8.5%, TG: 1.5%) from SGD2.05. 
  • M1 trades at 8.2x FY18F EV/EBITDA, below the 9-11x of its local peers. Valuations are supported by a forecast dividend yield of over 6%.

Singapore Research RHB Invest | http://www.rhbinvest.com.sg/ 2017-07-19
RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 1.90 Down 2.050