M1 - RHB Invest 2017-10-17: Rising Aggression

M1 - RHB Invest 2017-10-17: Rising Aggression M1 LIMITED B2F.SI

M1 - Rising Aggression

  • M1’s 9M17 results were broadly in line. Fixed service revenue remained the bright spot, up 21% YTD, which more than offset the decline in mobile and international call revenues. 
  • We expect rising handset subsidies to weigh down on earnings in 4Q17 on the back of the recently-launched mySIM plans and new handsets offers. 
  • M1’s core earnings are projected to fall by 11.2% YoY in 2017 on intensifying competition as telcos aggressively lock-in customers ahead of TPG’s entry (we are projecting 2- year earnings CAGR of -14.2%). 
  • M1 trades at -1SD below its post GFC EV/EBITDA mean, with its share price underperforming the STI by 18% YTD – the worst among domestic peers. We believe the sharp de-rating has priced-in to a large extent, earnings risks from the fourth entrant. 
  • Maintain NEUTRAL and DCF-derived TP of SGD1.90.

Broadly in line. 

  • M1's 3Q17 core earnings fell 4% YoY on higher depreciation and interest expense but were relatively stable QoQ on higher EBITDA. This brought 9M17 core earnings to SGD101.5m (-14% YoY), at 77% of our and consensus estimates. 
  • We deem this as broadly in line as subscriber acquisition cost (SAC) is expected to trend higher in 4Q17 from the launch of new handsets (iPhone 8/10) and the enhanced mySIM plans.
  • Fixed service remained the fastest growing segment, up 21.4% YoY in 1H17 (3Q17: +20% YoY), and now make up 12% of overall revenue from 10% in 2016 – this is supported by multi-year private sector and government jobs (including smart nation initiatives).

Mobile service revenue up 3.4% YoY in 3Q17. 

  • Postpaid revenue posted the first YoY growth since 1Q15 on stronger take-up of upsized data plans, higher data consumed (80% of postpaid subs on tiered data plans with 33% exceeding primary data bundles) and stronger contribution from Circles.Life – its mobile virtual network operator (MVNO) customer. 
  • Prepaid revenue however slipped a further 13.2% YoY on stiff competition from over-the-top (OTT) applications and voice substitution. 
  • Average postpaid data consumed continued to inch higher at 4.2GB/sub/mth from 3.9GB/subs/mth in 2Q17 (3Q16: 3.4GB/subs/mth).

New mySIM plans target new customers ahead of TPG’s entry. 

  • M1 has captured 11,000 customers on the new mySIM plans, which were launched in late August. Subscribers of the plans can also sign-up for subsidised handsets via a 2-year contract by paying SGD20-30 more a month on top of their monthly commitment via new offers introduced on 13 Oct.
  • We view the introduction of new data plans as largely pre-emptive and comes ahead of the launch by TPG Telecoms (TPG). The data-centric plans herald the return of unlimited mobile data in the market (tiered data plans were launched in 3Q12 to replace unlimited offerings). Management revealed that about 40% of those taking up the plans are new, with the remainder from customers recontracting.

NB-IOT network. 

  • While M1 has commercialised the nationwide narrowband internet of things (NB-IoT) network, management believes that mass market adoption is still some time away due to the evolving eco-system. That said, there remains good long-term revenue opportunities with M1 already collaborating with various industry verticals.

NEUTRAL call maintained with unchanged DCF-derived TP of SGD1.90 (WACC: 8.5%, TG: 1.55). 

  • Management has retained the earlier guidance of a decline in 2017 net profit and capex of SGD150m. We make no changes to our forecasts. 
  • M1’s core earnings are projected to fall by 11.2% YoY in 2017 on intensifying competition and as telcos aggressively lock-in customers ahead of the entry of TPG. 
  • M1 trades at -1SD below its post global financial crisis (GFC) EV/EBITDA mean, and M1's share price has underperformed the STI by 18% YTD – the worst among domestic peers. 
  • Key risks include stronger/weaker-than-expected competition, larger/smaller-than-expected capex and negative/positive dividend surprises.

Singapore Research RHB Invest | http://www.rhbinvest.com.sg/ 2017-10-17
RHB Invest SGX Stock Analyst Report NEUTRAL Maintain NEUTRAL 1.900 Same 1.900