M1 - DBS Research 2017-10-17: Depreciation, Interest Hit Bottom Line

M1 - DBS Vickers 2017-10-17: Depreciation, Interest Hit Bottom Line M1 LIMITED B2F.SI

M1 - Depreciation, Interest Hit Bottom Line

  • M1's 3Q17 net profit of S$32.7m (-5% y-o-y, -1% q-o-q) was in line with expectations.
  • Profit subdued by depreciation, interest and tax.
  • Service revenue supported by fixed, Circles.Life contributions.
  • Maintain FULLY VALUED with an unchanged Target Price of S$1.49.

What’s New 

Fixed segment, MVNO support service revenue. 

  • Revenue was driven by growth in fixed revenues and steady mobile segment. 
  • Fixed revenues increased to S$32.4m (+20% y-o-y, +4% q-o-q) due to higher fibre customer base and contributions from corporate segment projects. 
  • Mobile revenue was held steady by contributions from Circles.Life and higher data usage.

Depreciation, interest and tax subdue profits. 

  • 3Q17 net profit of S$32.7m (-5% y-o-y, 1% q-o-q) was in line with our expectations. Net profit was impacted by higher depreciation, interest expenses and tax costs. 
  • Higher fixed asset base drove up depreciation costs while finance costs went up due to higher borrowings and interest rate. 
  • Tax was lower in 3Q16 due to over-provision in the previous year being recognised in 3Q16.

Cost escalations to weigh on M1. 

  • Despite revenue share gains since 3Q16, we expect M1’s earnings to trend downwards due to adverse impact of fair value accounting (FVA) for iPhone (iPhone 8 take-up is rather slow) and higher staff costs to grow its enterprise business. 
  • Even in the unlikely scenario of M1 stabilising its EBITDA over FY18F/19F, its earnings will still decline due to high network and spectrum investments leading to higher depreciation, impacting dividends adversely.

Dividend yield is unappealing versus peers. 

  • Dividend yield has been the most critical factor for the stock price in the past. 
  • M1’s FY18F dividend yield of 5.4%, coupled with potential annual earnings decline of 12% over FY17F-19F, is unattractive versus Singtel’s ~5% yield with potential earnings CAGR of 3%. Circles.Life's success as an MVNO (Mobile Virtual Network Operator), on top of TPG’s entry in late 2018, further adds to the sector’s woes.


  • Our DCF-based (WACC 6.7%, terminal growth 0%) Target Price of S$1.49 indicates that the counter is overvalued by 18%. 
  • The counter offers 5.4% yield at current price levels.

Sachin MITTAL DBS Vickers | http://www.dbsvickers.com/ 2017-10-17
DBS Vickers SGX Stock Analyst Report FULLY VALUED Maintain FULLY VALUED 1.490 Same 1.490