M1 (M1 SP) - UOB Kay Hian 2018-01-24: 4Q17 Heading Into Uncharted Territory

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M1 LIMITED B2F.SI

M1 (M1 SP) - 4Q17: Heading Into Uncharted Territory

• M1 benefitted from seasonal strength in post-paid mobile and projects for corporate customers in fixed services in 4Q17. Management did not provide guidance on net profit, a reflection of heightened uncertainties with the impending entry of TPG Telecom in 2H18. 
• M1 has made progress in fixed services but its fate hinges on the mobile business, which accounted for 76.7% of service revenue in 4Q17. 
• Maintain HOLD with a new target price of S$1.84. Entry price: S$1.70.

RESULTS

• M1 reported a net profit of S$31m for 4Q17, down 2.5% y-o-y and 5.2% q-o-q. Results were better than our projections as the expected increase in handset subsidies did not materialised.

Mobile: Seasonal strength in post-paid mobile. 

• M1 benefitted from healthy net addition of 20,000 post-paid subscribers. Post-paid ARPU rebounded 5.8% q-o-q but declined 1.2% y-o-y to S$56.40. Post-paid mobile revenue increased by a healthy 5.8% y-o-y with a seasonal up-tick in roaming. 
• Unfortunately, pre-paid mobile revenue contracted 10.5% y-o-y due to a contraction in pre-paid subscriber base of 3.2% y-o-y and decline in pre-paid ARPU of 8.7% y-o-y. The reception for iPhone X turned out to be less enthusiastic than expected. Thus, handset subsidies were manageable at S$26.5m, compared to S$23.9m in 3Q17.
• Management did not disclose the contribution of SIM-only plans and Circles.Life, MVNO hosted by M1, to net addition. The two factors could have contributed to the muted handset subsidies.

Fixed services: Maintains growth momentum. 

• Revenue from fixed services grew 32.7% y-o-y and contributed 16.8% of service revenue (4Q16: 13.5%). 
• M1 added 7,000 subscribers (3Q17: 6,000). ARPU increased 4.9% q-o-q to S$45. Corporate customers accounted for 10% of customer base but contributed 50% of fixed services revenue.

Shift in revenue mix affects EBITDA margins. 

• EBITDA margin on service revenue receded 1.2ppt y-o-y to 34.6%. The expansion of fixed services puts pressure on EBITDA margin, as it commands a lower EBITDA margin.

STOCK IMPACT

Guidance for 2018. 

• Management did not provide guidance for net profit for 2018. This is a reflection of heightened uncertainties due to impending entry of TPG Telecom as the 4th mobile operator in Singapore during 2H18. TPG could use lower pricing to gain a foothold but incumbents would react to fend off competition. Pricing erosion is inevitable.
• Capex is expected to be S$120m. Management intends to maintain dividend payout ratio at 80% for 2018.

Broadens offerings for corporate customers. 

• M1 has expanded its suite of solutions for corporate customers: 
  1. Symmetrical passive optical network (PON) connectivity: M1 has launched next-generation symmetrical PON connections that deliver reliable low-latency symmetrical 10Gbps upload/download speeds with guaranteed bitrates. Corporate customers can utilise the service for cloud computing, software defined networking (SDN) and 4K/8K video transfers.
  2. Unified operations monitoring centre (UOMC): UMOC provides real-time information for network services and IT infrastructure in private and public clouds. It delivers predictive information and early warnings, which enable customers to take preventive actions for rectification before equipment failures occur. The new service addresses the threats posed by cyber-attacks.

Expanded coverage of fibre optics network. 

• M1 has expanded its fibre optics network with full redundancy capability to buildings in Shenton Way, Orchard Road and Buona Vista. The expanded network covers more than 55 shopping malls, offices and commercial buildings. It allows M1 to better provide end-to-end solutions, such as activation within 7-10 days of sign-up compared to the previous 14 days.

Offering NB-IoT solutions. 

• M1 was the first to launch the commercial Narrowband Internet of Things (NB-IoT) network in Southeast Asia in Aug 17. It is working on two projects for NB-IoT: 
  1. M1 and Keppel Electric are collaborating on NB-IoT Energy Management Meter, which manages power and water meters at customers’ premises. These smart meters enable commercial, industrial and residential customers to track their energy usage in an efficient and cost effective manner.
  2. M1, OTTO Waste Systems and SmartCity Solutions have entered into an MOU to implement the first intelligent waste management system in Singapore utilising NB-IoT. OTTO Group is a leading global waste management solutions company. Sensors attached to OTTO’s trash bin receptacles will send out real-time alerts, such as fill levels, to SmartCity’s centralised management system. The waste data collected is analysed using M1’s data analytics platform to streamline the distribution of bins nationwide and waste collection frequency.

EARNINGS REVISION/RISK

• We raise our earnings forecasts by 12.5% for 2018 and 16.5% for 2019 due to better progress in fixed services. 
• Nevertheless, the fate of M1 is tied to the mobile business, which accounted for 76.7% of service revenue in 4Q17.

VALUATION/RECOMMENDATION

• Our new target price of S$1.84 is based on DCF (COE: 7.5%, terminal growth: 1.0%).

SHARE PRICE CATALYST

• Damage from impending entry of TPG Telecom in 2018.
• Savings in capex from sharing of mobile infrastructure with StarHub.

Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2018-01-24

UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 1.84 Up 1.75