M1 Limited - CIMB Research 2018-01-24: 4Q17 Earnings Miss Despite Higher Revenues

M1 Limited - CIMB Research 2018-01-24: 4Q17: Earnings Miss Despite Higher Revenues M1 LIMITED B2F.SI

M1 Limited - 4Q17: Earnings Miss Despite Higher Revenues

  • M1's FY17 core EPS missed our estimate by 7.6% (Bloomberg consensus: in line) due to higher-than-expected device subsidies and interest cost.
  • Mobile service revenue rose 4.2% y-o-y (+2.8% q-o-q) in 4Q17. Fixed services revenue growth accelerated by 32.7% y-o-y (+11.4% q-o-q).
  • The EBITDA margin on service revenue in 4Q17 fell 0.4% pts y-o-y due to higher mobile SAC and wholesale costs of fixed services.
  • We estimate core EPS will rise 5% in FY18F, then fall 22%/15% in FY19F/20F (-15%/- 14%, ex-700MHz amortisation).
  • Maintain HOLD with a 3% higher DCF-based target price of S$1.85.



FY17 core EPS below expectations; 80% dividend payout 

  • M1's 4Q17 EBITDA rose 5.8% y-o-y (-0.9% q-o-q) on higher service revenue and lower opex. Core EPS was largely flat y-o-y (-7.0% q-o-q) due to higher net interest cost, depreciation and effective tax rate. FY17 core EPS (-10.6% y-o-y) missed our estimate by 7.6% (Bloomberg consensus: in line). 
  • Key variances: higher-than-expected device subsidies and interest cost. 
  • Final DPS was 6.2 Scts (FY17: 11.4 Scts, payout: 80%). 
  • For FY18, M1 guided for lower capex of S$120m (FY17: S$151m) and 80% dividend payout ratio.


Continued growth in mobile revenue driven by postpaid & Circles.Life 

  • M1's 4Q17 mobile service revenue (77% of total) rose for the second consecutive quarter, up 4.2% y-o-y (+2.8% q-o-q). This was mainly due to postpaid revenue, which rose 5.8% y-o-y (+3.6% q-o-q), driven by the take-up of higher-end plans, increased data roaming usage and greater contribution from Circles.Life (CL). 
  • Prepaid revenue fell a milder 10.5% y-o-y (- 4.0% q-o-q) from lower voice usage. Prepaid sub net adds picked up by 11k due to yearend promotions while postpaid net adds rose a healthy 20k q-o-q.


Fixed services growth accelerated y-o-y 

  • M1's Fixed services revenue (17% of total) growth accelerated to 32.7% y-o-y (+11.4% q-o-q) in 4Q17 on the back of an increased fibre customer base (+7k q-o-q), 4.9% rise in ARPU to S$45 (upgrades to higher-end residential plans) and higher revenue booking from customer projects. 
  • M1 says the corporate segment formed 10% of its customer base and 50% of its fixed services revenue in 4Q17.


EBITDA margin eased 0.4% pts y-o-y 

  • The EBITDA margin on service revenue eased 0.4% pts y-o-y (-1.7% pts q-o-q) to 34.6% in 4Q17. This was mainly due to increased:
    1. subscriber acquisition cost (SAC) from the launch of high-end devices and take-up of higher-end plans,
    2. wholesale costs of fixed services from a larger customer base, and
    3. staff costs from salary increments and bonus payouts. 
  • Net debt/EBITDA inched up to 1.4x (3Q17: 1.3x) from higher net debt.


Core EPS could grow 5% in FY18F before falling in FY19-20F 

  • We raise FY18/19F core EPS by 7.4%/6.9% after:
    1. factoring in higher fixed services revenue,
    2. deferring the impact from TPG to FY19F and
    3. assuming lower handset sales in FY19F. 
  • We forecast core EPS to rise 5.4% in FY18F (led by higher fixed services revenue), then fall 22.3%/15.4% in FY19F/20F on more intense mobile competition and amortisation of 700MHz spectrum rights (ex-700MHz: -14.7%/-14.3%).


Maintain HOLD with a 3% higher DCF-based target price of S$1.85 

  • Maintain HOLD with a 3% higher DCF-based target price of S$1.85 (WACC: 7.1%). 
  • We believe M1’s share price reflects the competition risk from TPG. 
  • M1’s 11.6x FY18F EV/OpFCF is at a 34% discount to ASEAN telcos; we think this is fair given the possible decline in earnings. 
  • A good entry point would be below S$1.50 (bear case), and a good exit point above S$2.20 (bull case). 
  • Key upside/downside risk: better-/worse-than-expected impact from TPG’s entry.




FOONG Choong Chen CFA CIMB Research | http://research.itradecimb.com/ 2018-01-24
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 1.85 Up 1.800



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