M1 LIMITED
B2F.SI
M1 Limited - 1Q18 Growth In Mobile And Fixed Services
- M1's 1Q18 results were in line. Core EPS at 26%/29% of our/consensus FY18 forecasts.
- Mobile service revenue rose 2.5% y-o-y (-1.8% q-o-q) in 1Q18. Fixed services revenue growth was a milder but still healthy 13.9% y-o-y (-5.6% q-o-q).
- EBITDA margin on service revenue in 1Q18 eased 0.4% pts y-o-y due to higher other cost of sales, staff cost, facilities expenses and other G&A cost.
- FY18-20F core EPS raised 6-7% mainly for SFRS 15. No major change in cashflows.
- Maintain HOLD with an unchanged DCF-based target price of S$1.85.
1Q18 results were in line with expectations
- M1 prepared its 1Q18 results and retrospectively adjusted its 1Q17-4Q17 numbers, in accordance with SFRS 15.
- EBITDA rose 1.9% y-o-y (-0.9% q-o-q) in 1Q18 due to higher service revenue. 1Q18 core EPS grew by a stronger 7.4% y-o-y (+11.2% q-o-q) due to lower depreciation and effective tax rate, partly offset by higher net interest cost.
- Overall, 1Q18 EBITDA/core EPS were largely in line, coming in at 24.5%/25.7% of our FY18 forecasts (Bloomberg consensus: 25.6%/28.6%). As usual, no dividends were declared in 1Q18.
Mobile service revenue growth led by postpaid
- 1Q18 mobile service revenue (76% of total service revenue) rose 2.5% y-o-y (-1.8% q-o-q). This was mainly due to postpaid revenue, which rose 4.3% y-o-y (-1.3% q-o-q), driven by subs growth in higher-end plans and greater contribution from Circles.Life (CL).
- Prepaid revenue fell by a steeper 11.1% y-o-y (-6.2% q-o-q) from keener competition as its competitors gave retailers costly incentives to acquire subs. Q-o-q, prepaid subs declined 59k while postpaid net adds rose a healthy 12k q-o-q.
Healthy fixed services revenue growth y-o-y
- After a strong 4Q17, fixed services revenue (17% of total service revenue) rose by a milder but still healthy 13.9% y-o-y (-5.6% q-o-q) in 1Q18. This was supported by an increased fibre customer base (+5k q-o-q), on steady ARPU q-o-q at S$44.
- M1 says the corporate and government segment formed 37% of service revenue in 1Q18 and grew by 19% y-o-y. M1 believes that fixed services revenue will continue to grow meaningfully this year as it has secured new corporate customers in recent months.
EBITDA margin eased 0.4% pts y-o-y
- EBITDA margin on service revenue eased 0.4% pts y-o-y (+1.0% pts q-o-q) to 40.8% in 1Q18. This was mainly due to increased:
- other cost of sales (customer projects),
- staff cost (salary increments),
- facilities expenses (bigger network) and
- other general and administrative (G&A) costs.
- Net debt/EBITDA eased slightly to 1.25x (4Q17: 1.33x) from lower net debt.
Core EPS could grow 5% in FY18F before falling in FY19-20F
- M1’s FY17 core net profit has been retrospectively raised by 5.4% to S$137m post-adoption of SFRS 15. We raise FY18-20F core net profit by 6-7% mainly for the same reason.
- We forecast core EPS to rise 5.3% in FY18F (led by higher fixed services revenue), then fall 21.9%/14.5% in FY19F/20F on more intense mobile competition and amortisation of 700MHz spectrum rights (ex-700MHz: -14.7%/-13.5%).
- The adoption of SFRS 15 has had no significant impact on M1’s cashflows.
Maintain HOLD with an unchanged DCF-based target price of S$1.85
- 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 10.9x 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$2.10 (bull case).
- Key upside/downside risk: better-/worse-than-expected impact from TPG’s entry.
FOONG Choong Chen CFA
CIMB Research
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http://research.itradecimb.com/
2018-04-17
CIMB Research
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