M1 (M1 SP) - UOB Kay Hian 2018-03-27: Diversifying And Expanding Across Broader Horizon

M1 (M1 SP) - UOB Kay Hian 2018-03-27: Diversifying And Expanding Across Broader Horizon M1 LIMITED B2F.SI

M1 (M1 SP) - Diversifying And Expanding Across Broader Horizon

  • M1’s mainstay mobile business faces stiff competition from the impending entry of TPG Telecom as the fourth mobile player in 2H18. Thus, diversification to newer pastures has taken on greater urgency. 
  • Management plans to expand into corporate ICT and digital services, eg managed infrastructure, cyber security, smart nation solutions, cloud computing and data analytics. Margins for these solutions are lower and would drag overall margins lower as well. 
  • Maintain SELL. Target: S$1.60.



WHAT’S NEW

  • M1 held its Investor Day yesterday. Below are the key takeaways:

Diversification takes on greater urgency. 

  • Mobile, fixed network services and corporate ICT & digital services contributed 76.7%, 16.8% and 1-2% of service revenue respectively in 4Q17. Management sees corporate ICT/digital services as a new growth engine. It envisages its revenue mix to shift toward 60:20:20 in future. 
  • M1 is looking at acquisitions in complementary and adjacent businesses to achieve the desired revenue mix.

Fixed network services to maintain growth momentum. 

  • Revenue from fixed network services grew 32.7% y-o-y and contributed 16.8% of service revenue in 4Q17 (4Q16: 13.5%). 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.

Recent track record in public sector projects. 

  • M1 has secured several multi-year contracts from government agencies and large corporations: 
    1. Managed secured Wide Area Network (WAN) connectivity for schools.
    2. WiFi connectivity for Land Transport Authority (LTA). M1 has an 80% market share for transportation nodes and public access venues.
    3. M1 is the telco provider for the government’s Internet separation project to disconnect internal systems from the Internet.
    4. Smart Port solutions for management of automated guided vehicle (AVG) and tracking vessel and cargo movements.


Opportunities in corporate ICT and digital services. 

  • M1 will expand into corporate ICT and digital services to enhance future growth. It could layer its managed services and fixed & mobile connectivity on top of its ICT solutions.
  • Management intends to focus on three areas: 
    1. Managed infrastructure and cyber security. M1’s unified operations monitoring centre (UOMC) helps monitor trends for real-time information to deliver predictive information for equipment and systems failures, and proactive resolving of issues for enterprise customers.
    2. Smart Nation solutions, which require ultra high-speed and narrowband Internet-of-thing (NB IoT) connectivity. M1 plans to provide retail solutions (mobile point-of-sale (mPOS), digital signage and video & data analytics) and transport solutions (fleet management and cargo tracking).
    3. Cloud computing and data analytics. M1 plans to provide hybrid cloud solutions in partnership with AWS, partner application developers to offer cloud-based software-as-a-service (SAAS) and big data solutions using telco data.
  • Management recognises that the corporate ICT and digital services business commands lower margins, which would drag overall margins lower.

M1 partners Keppel Electric to offer new power options. 

  • M1 is collaborating with Keppel Electric, who is a participating retailer in the Jurong Open Electricity Market (OEM) soft launch, on joint product bundling. 
  • From 24 Mar 18, customers residing in Jurong will be able to sign up for attractive electricity plans offered by Keppel Electric at the M1 Shop located at IMM Jurong to enjoy exclusive bundled offers and discounts during the Jurong OEM soft launch. New and re-contracting mobile customers can sign up for attractive electricity plans in-store and enjoy S$80 off Samsung Galaxy S9 and S9+, or a free 6 months of Upsized Data worth S$35.40.


STOCK IMPACT


Seeking opportunities elsewhere. 

  • M1’s mainstay mobile business faces stiff competition from the impending entry of TPG Telecom as the fourth mobile operator in 2H18. Thus, diversification to newer pastures has taken on greater urgency. However, the new ventures require gestation period to scale up. While earnings contributions are likely to be positive, their margins are lower and would drag overall margins lower.


EARNINGS REVISION/RISK

  • We maintain our existing earnings forecast.


VALUATION/RECOMMENDATION

  • Maintain SELL. The mobile business in Singapore accounted for a whopping 76.7% of its service revenue in 4Q17. 
  • Our new target price of S$1.60 is based on DCF (COE: 8.5%, terminal growth: 1.0%).


SHARE PRICE CATALYST

  • Damage from impending entry of TPG Telecom in 2H18.
  • Savings in capex from sharing of mobile infrastructure with StarHub.




Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2018-03-27
UOB Kay Hian SGX Stock Analyst Report SELL Downgrade HOLD 1.60 Down 1.840



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