M1 Limited - CIMB Research 2018-03-14: Competition Risk Is Better Priced In Now

M1 LIMITED B2F.SI

M1 Limited - Competition Risk Is Better Priced In Now

We forecast M1's core EPS to decline 22%/15% y-o-y in FY19/20F due to more intense competition upon TPG’s entry (bear case: -31%/-28%; bull case: -14%/-5%).
80% payout should be sustainable but yields may decline, in line with core EPS.
Maintain HOLD with an unchanged DCF-based target price of S$1.85.

We expect M1’s service revenue to rise 2.3% in FY18F (FY17: 2.8%), driven by growth in fixed services (+17.8%) on more Enterprise contracts and fibre customers.
Mobile revenues should be steady y-o-y while international call services revenue continues to decline by 8.3% y-o-y due to lower international roaming/voice usage.
Despite the higher mix of fixed services revenue, we forecast FY18F EBITDA margin to hold steady at 36.3% as wholesale cost of fixed services will benefit from lower interconnection offer rates from 1 Jan 2018. Hence, in line with higher revenue, we forecast core EPS to rise 5.4% in FY18F.

In FY19/20F, we forecast service revenue to ease by 2.8%/3.0% y-o-y, led by a 5.8%/5.8% y-o-y decline in mobile revenues as competition heats up after TPG’s expected service launch by end-FY18.
EBITDA margin is expected to be compressed by 1.8%/1.8% pts y-o-y to 34.5%/32.7% in FY19F/20F from the lower revenue and higher marketing spend. After factoring in amortisation of 700MHz spectrum rights, we forecast core EPS to fall 22.3%/15.4% y-o-y (ex-700MHz: -14.7%/-14.3%).

We are factoring in a 10% impact on M1’s mobile ARPU (base case) in FY19-20F. This is after the sizeable ARPU erosion (post/prepaid: -12%/-33%) between FY15-18F due to incumbents’ revised offers since 2016 in preparation for the fourth telco’s entry.
In our scenario analysis, assuming a -15% impact on mobile ARPU (bear case), M1’s core EPS declines by 30.7%/28.1% y-o-y in FY19/20F. In the bull case (-5% mobile ARPU impact), core EPS declines by a milder 13.8%/4.7% y-o-y in FY19/20F.

We forecast a lower capex of S$120m in FY18F (FY17: S$151m), in line with M1’s guidance that it will leapfrog to 5G and avoid costly intermediate upgrades.
From FY19F onwards, we further assume that capex will ease to S$104m p.a. (c.13% of service revenue) due to savings from M1’s network sharing with StarHub.

Despite the chunky spectrum payments and competition threat, we expect M1 to maintain its 80% payout ratio in FY18-20F as net debt/EBITDA will rise to a peak of 1.8x at end-FY18F, and then ease. However, we see the 6.6% yield in FY18F falling to 4.3% by FY20F (when earnings hit a trough), in line with core EPS.

Maintain HOLD with an unchanged 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 11.1x FY18F EV/OpFCF is at a 33% 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 CIMB Research | http://research.itradecimb.com/ 2018-03-14

CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 1.850 Same 1.850