M1 Limited - CIMB Research 2017-09-22: Competition Risk Is Better Priced In Now

M1 LIMITED B2F.SI

M1 Limited - Competition Risk Is Better Priced In Now

In our base case (-10% ARPU impact), we forecast core EPS declining by 37.0% in FY17F-20F.
In our bull/bear case (-5%/-15% ARPU impact), core EPS falls by 21.5%/52.6% in FY17F-20F.
Capex/sales may decline from 18.5%/17.2% in FY17F/18F to 13.9% in FY19F assuming network sharing with StarHub.

80% payout should be sustainable but yields may decline, in line with core EPS.
Upgrade M1 to Hold; target price raised 5.9% to S$1.80 after rolling forward to FY18F.

We expect M1’s service revenue to be flat in FY17F.
Mobile revenues should fall (-1.7%) due to lower international roaming/voice usage and some negative effects from the take-up of SIM-only plans launched last year. This is offset by growth in Fixed Services (+18.6%), driven by Enterprise contracts and fibre customers.
We forecast flat EBITDA, while core EPS may ease 3.2%. While we see strong demand for the iPhone 8, to reduce the impact of subsidies, M1 recognises a portion of its subscription revenues upfront.

In FY18, we forecast service revenue to ease by 0.6%, led by a 2.5% decline in mobile as competition starts to heat up around TPG’s expected service launch in 2H18.
We then expect service revenue to decline by 2.6% in FY19F, with a bigger 5.1% drop in mobile revenue due to the full-year impact of more competition from TPG. Correspondingly, we forecast EBITDA/core EPS to fall 3.8%/9.7% in FY18F and 6.7%/21.9% in FY19F, on lower revenue and higher marketing spend.

We are factoring in a 10% impact on M1’s mobile ARPU (base case) in FY17F-20F, on top of the sizeable ARPU erosion (post/prepaid: -11%/-28%) across FY15-17F due to incumbents’ offers launched in 2016. This results in EBITDA/core EPS declining by 15.3%/37.0%.
In our scenario analysis, assuming a -15% impact on mobile ARPU (bear case), M1’s EBITDA/core EPS decline by 23.5%/52.6%. In the bull case (-5% mobile ARPU impact), EBITDA/core EPS decline by a milder 7.1%/21.5%.

Our capex assumptions for FY17F of S$150m are in line with M1’s guidance, including one-off investments for NB-IOT network upgrades, data analytics and ICT-related projects.
We assume capex will normalise to S$140m in FY18 and from FY19 onwards, we factor in 20% capex savings from M1’s network sharing with StarHub, bringing long-term capex down to S$112m p.a. (c.14% of service revenue).

Despite the high capex, chunky spectrum payments and competition threat, we expect M1 to maintain its 80% payout ratio in FY17F-19F as net debt/EBITDA will rise to a peak of 1.7x at end-FY18F, then ease.
Still, we see yields falling from 6.3% in FY17F to 3.9% by FY20F (when earnings hit a trough), in line with core EPS.

We upgrade M1 from Reduce to Hold, with a 5.9% higher DCF-based target price of S$1.80 (WACC: 7.1%), after rolling forward to FY18F.
We believe M1’s share price better reflects competition risk from TPG.
M1’s 12.8x FY18F EV/OpFCF is at a 25% discount to ASEAN telcos, which we think is fair given the possible decline in earnings. A good entry point would be below S$1.47 (bear case) and exit point above S$2.14 (bull case).
Upside/downside risks are better/worse-than-expected impact from TPG’s entry.

FOONG Choong Chen CFA CIMB Research | http://research.itradecimb.com/ 2017-09-22

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