M1 (M1 SP) - DBS Research 2018-01-24: Benefits From Cheaper MySIM Plans And Fixed Services

M1 LIMITED B2F.SI

M1 (M1 SP) - Benefits From Cheaper MySIM Plans And Fixed Services

M1 Ltd's 4Q17 net profit of S$ 31m (-2.5% y-o-y, -5% q-o-q) was in line with expectations.
Circles.Life and fixed services supported revenues.
Handset subsidies and staff costs weighed on earnings.
Maintain FULLY VALUED with an unchanged Target Price of S$ 1.49.

M1's 4Q17 service revenues of S$215m (+7% y-o-y, +4% q-o-q) was driven by growth in mobile and fixed service revenues. Mobile service revenues grew 4% y-o-y largely supported by greater contributions from its Mobile Virtual Network Operator (MVNO) Circles.Life, and higher postpaid subscriber acquisitions through mySIM plans offering more data at lower price than its traditional plans.
M1 offers both mySIM plans (more data with less voice minutes) and traditional plans to its customers. Fixed revenues increased to S$36m (+33% y-o-y, +12% q-o-q) due to higher fiber customer base and projects from the corporate segment.

4Q17 net profit of S$ 31m (-2.5% y-o-y) was in line with our expectations. Postpaid acquisition cost for the quarter jumped 17% y-o-y as M1 pushed for higher end plans.
Staff costs also grew 12% y-o-y largely due to higher headcount in the fixed services segment. Tax expense also increased 36% y-o-y weighing down earnings further.

We expect its local peers to react to these cheaper plans or risk losing market share to M1. Circles.Life’s success as an MVNO (Mobile Virtual Network Operator) and the entry of MyRepublic in early 2018 is likely to stir up competition in the low-end segment, where M1 is dominant, causing further disruption to earnings and dividends.
Factoring all this, we project that M1’s EBITDA will continue to contract at an annual rate of 3.0% in FY17-20F with earnings declining at an annual rate of 12%. This should negatively impact M1’s dividend payment, which is set at 80% of earnings.
Handset subsidies and dividend payments, being critical factors for M1, should therefore have a negative impact on its share price. The carrier is also seeing higher project related expenses in the enterprise segment. This has pushed down M1’s EBITDA in the recent quarters and would likely be further exacerbated by a rise in depreciation and amortisation costs as M1 invests on network assets and spectrum.
M1 is expected to start amortising the 700MHz spectrum acquired in 2017 in 2018 or 2019, which could potentially increase M1’s amortisation expenses by ~S$12.5m.

Dividend yield has been the most critical factor for M1's stock price in the past. M1’s FY18F dividend yield of 5.2%, coupled with potential annual earnings decline of 12% over FY17-20F, is not attractive versus Singtel’s ~5% yield with potential earnings CAGR of 3%.

Our DCF based (WACC 6.7%, terminal growth 0%) Target Price of S$ 1.49 indicates the counter is overvalued by ~20%.
The counter offers ~5.2% yield at the current price levels.

Sachin MITTAL DBS Vickers | http://www.dbsvickers.com/ 2018-01-24

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