M1 - DBS Research 2017-10-16: Earnings To Diverge From EBITDA

M1 LIMITED B2F.SI

M1 - Earnings To Diverge From EBITDA

Yield less attractive in the backdrop of falling earnings.
Higher depreciation and amortisation to pressure earnings.
New mySIM plans could improve market share, but ARPU dilution will hurt revenue.

Dividend yield has been the most critical factor for M1's stock price in the past. M1’s FY18F dividend yield of 5.6%, coupled with potential annual earnings decline of 12% over FY17F-19F, is not attractive versus Singtel’s ~5% yield with potential earnings CAGR of 3%.
Circles.Life success as an MVNO (Mobile Virtual Network Operator), on top of TPG’s entry in late 2018, further adds to the sector’s woes.

Market is not paying enough attention to Circles.Life and the big divergence between M1’s EBITDA and earnings. Circles.Life in its short history of less than 12-months of operations seems to be doing well by virtue of its service delivery model and cheaper data pricing.
Moreover, even under the bull-case scenario of M1 sustaining EBITDA in FY18F/19F, its earnings and dividends (80% payout ratio in FY17) are set to decline sharply due to rising depreciation of network assets and sharp rise in amortisation costs as M1 is set to pay S$188m for 700MHz spectrum when it is available.

Weak 2H17F results even before the actual launch of operations by TPG (expected in late 2018) could lead to further downward revision in consensus earnings and the valuation of M1, in our view.

Lowered Target Price to S$1.49.
We raise WACC to 6.7% from 6.3% earlier as we expect higher volatility in the stock to raise the cost of equity. We roll forward our DCF valuation (terminal growth 0%) to FY18F.

TPG struggling to roll out a network. Any potential delay in TPG’s rollout due to operational challenges could help M1 to sustain its revenue share. This could lift our TP to S$1.66.

The new SIM-only plans are 20-70% cheaper compared to M1's previous SIM-only plans while its new mySIMe plans allow re-contracting subscribers to switch down and enjoy the same data allowances, albeit with lower voice and SMS allocation.
Similarly, new mySIMe plans (with smartphone) offer a much better bargain, compared to the older bundled plans at similar price points (even after considering data upsize packages) for heavy data users, with better data allocation and similar upfront price for smartphones. For example, a 64GB iPhone 8 would cost S$680 upfront with the S$40 mySIMe plans with 5GB of mobile data, while the same phone could cost S$665 upfront with the S$42 Lite+ plans with only 3GB of mobile data.
With the ability to choose between older legacy heavy plans and cheaper data plans, we are likely to see M1’s subscribers looking to minimise their monthly rentals as they see fit, resulting in at least a portion of the subscribers opting for lower-ARPU packages, leading to ARPU dilution. This will likely weigh on M1's revenues, which are ~70% made up of mobile.

In addition to revenue pressure, M1 is seeing escalating costs as the company looks to expand its headcount. The carrier is also seeing higher project-related expenses. This has pushed down M1’s EBITDA in recent quarters, which would likely be further exacerbated by a sharp rise in depreciation and amortisation costs as M1 invests in network assets and spectrum.
M1 is expected to pay S$188m for 700MHz spectrum when it is available which would push down earnings further, resulting in lower dividends.

Sachin MITTAL DBS Vickers | http://www.dbsvickers.com/ 2017-10-16

DBS Vickers SGX Stock Analyst Report FULLY VALUED Maintain FULLY VALUED 1.49 Down 1.780