M1 (M1 SP) - Maybank Kim Eng 2018-01-24: 4Q17 – Reprieve For Now

M1 (M1 SP) - Maybank Kim Eng 2018-01-24: 4Q17 – Reprieve For Now
    M1 LIMITED B2F.SI

M1 (M1 SP) - 4Q17 – Reprieve For Now


Earnings beat on lower handset sales/subsidy costs 

  • Our expectation of 4Q17 losses for M1 did not materialise as weak iPhone 8 and X demand resulted in lower handset subsidy costs y-o-y. 4Q17 EBITDA and net profit exceeded FactSet consensus estimates by 2%/8% at, SGD75m (-1% q-o-q; +4% y-o-y) and SGD31m (-5% q-o-q; -3% y-o-y), while revenue was inline at SGD307m (+22% q-o-q; -2% y-o-y). 
  • Accordingly, we raised our profit forecasts for 2018E/19E/20E by 75%/13%/6% but EBITDA by only 24%%/0%/-2%. We raised our DCF-based Target Price by only 2.5% to SGD1.63 due to the low EBITDA impact (WACC 4.1%, LTG -1.0%, unchanged). 
  • Maintain SELL as we expect competitive intensity to increase as TPG (TPM AU, Not Rated) and MVNO MyRepublic (Not Listed) launch their services this year.


Exposing an entry point for new entrants 

  • Management disclosed the postpaid subscriber base under contract is c70%. This contracted proportion is lower than our expectation of c90% as a result of weak iPhone demand and the increased popularity of SIMonly plans. 
  • Assuming this trend prevailed industry wide, it would provide an opening for new entrants, such as TPG and MVNO MyRepublic to try and poach revenues, if not subscribers, from the incumbents. As such, although we have lowered our 2018E handset subsidy assumption to SGD97m from SGD149m, we now assume blended ARPU declines by 3% instead of 1%. 
  • We now also assume a -5%/-2% ARPU in 2019E/20E from - 1%/-1%.


No operational guidance but changes are coming 

  • Management uncharacteristically did not provide guidance on revenue, EBITDA margin and profit. We believe this is partly due to the upcoming adoption of FRS 115 accounting standard that will change how contract revenues and costs are recorded. This shift will be unveiled during 1Q18 results. 
  • Our revised forecasts in this note reflect the current accounting standards. Capex guidance for this year is SGD120m.


SELL rating maintained 

  • We expect tariff pressure to emerge on currently higher priced wireless data plans as new operators reveal their offerings this year and intensify further in 2019E. 
  • The upside risk to our SELL rating is benign competition.


Forecast change highlights 

  • We have shifted to a base-case scenario where tariff and ARPU pressure will emerge from our previous assumptions that incumbents, such as M1 would be able to capitalise on new smartphone launches to lock in nearly all subscribers to fresh 24-month contracts.. This is reminiscent of the EBITDA margin reduction of 400-500bps for the industry during 2009-2012 from 3G unlimited data plan tariff wars.
  • We have reduced our 2018E capex by 23.6% to SGD128.7 given management guidance of SGD120m but assume competition on network quality and indoor access will result in capex elevating anew from 2019E onwards. We have also assumed SGD188m in spectrum payments for the 700Mhz frequency band in 2019E.
  • We illustrate our latest forecasts against FactSet consensus estimates in Figure 2 but caution that consensus estimates at this juncture may also be under revision.
  • Our revised forecasts do not also take into account the impact from the adoption of FRS 115 that will lead to a restatement of 2017 financials. Based on our understanding of the basic framework of the changes, a certain portion of services revenues could be classified as handset revenues to match against handset costs to negate subsidies. 
  • Meanwhile, certain acquisition-related expenses, such as sales commissions could be capitalised and then amortised over the contract period.



Swing Factors


Upside


  • A benign competitive environment or a hasty retreat by new entrants would be an unexpected surprise.
  • Growth in fixed network via fixed broadband and/or enterprise could provide earnings surprises in the medium to long term.
  • Any takeover interest by a new entrant or TPG could trigger a sector re-rating.

Downside


  • Should TPG resort to handset subsidies to poach subscribers an escalation in incumbents’ own efforts could take place.
  • Higher-than-expected capex pressure as a result of competition and/or 5G rollout.
  • Risks of a more rapid decline in wireless voice, SMS and roaming as data adoption gains momentum.




Luis Hilado Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2018-01-24
Maybank Kim Eng SGX Stock Analyst Report SELL Maintain SELL 1.63 Up 1.590



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