M1 (M1 SP) - Maybank Kim Eng 2017-10-17: No Drama, As Expected

M1 (M1 SP) - Maybank Kim Eng 2017-10-17: No Drama, As Expected M1 LIMITED B2F.SI

M1 (M1 SP) - No Drama, As Expected


Steady as she goes 

  • M1’s 3Q17 results were in line with MKE and FactSet consensus expectations in terms of revenue, EBITDA and core profit. 
  • On an absolute basis revenues were SGD252m (flat QoQ, +1% YoY), EBITDA SGD75m (+2% QoQ; +1% YoY), and core profit SGD32.5m (flat QoQ; -5% YoY). However, we remain bearish due to expected heavy 4Q17 handset subsidies as iPhone X demand makes an initial impact, and as such, expect SGD11m of losses in the coming quarter. 
  • Poor demand or delays in shipments would only shift the burden to 2018E. Maintain SELL and DCF-based Target Price of SGD1.59 (WACC 4.1%, LTG -1%).


Positives….

  • We see the potential for near-term profit relief if subscribers that opt for the recently launched higher value and even unlimited data plans provide a near-term lift to ARPU and revenues, and others hold off recontracting for better deals in 2018E when TPG Singapore (Not Listed) and/or MyRepublic (Not Listed) launch their wireless services.
  • Meanwhile, the company’s balance sheet, even on our lower-thanconsensus estimates, remains adequate to sustain the 80% dividend payout policy.


…outweighed by risks 

  • Aside from upcoming handset subsidies, the return of unlimited data plans cap data yields and set up potential pricing competition in the future, as was the case pre-2012. Furthermore, just today mobile virtual network operator (MVNO) Circles.Life (Not Listed) began offering free trial services to number porters from the incumbents. 
  • With 20% of M1’s postpaid base not on contracts, this leaves room for at least temporary churn and revenue pressure. If demand for the new set of smartphones is poor the risk is new entrants could gain more share than our expectation.


Too soon for negatives to be fully priced in 

  • Despite the significant underperformance of the stock, we see further downside risk as consensus earnings are too high, in our view.
  • Competitive intensity is also set to increase. Reiterate SELL.


Swing Factors


Upside

  • Growth in fixed network via fixed broadband and/or enterprise could provide earnings surprises in the medium to long term.
  • If demand for upcoming smartphones is so strong that subsidies per unit can be reduced this would alleviate the margin pressure we are assuming.
  • Any takeover interest by new entrant or TPG could trigger re-rating.

Downside

  • Significant wireless revenue downside from a tariff war triggered by TPG’s eventual entry is not likely in consensus forecasts, as in our case.
  • Higher-than-expected capex pressure from competition and/or 5G rollout is not in forecasts.
  • Further acceleration in wireless voice, SMS and roaming as data adoption gains momentum is a possible risk.




Luis Hilado Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-10-17
Maybank Kim Eng SGX Stock Analyst Report SELL Maintain SELL 1.590 Same 1.590



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