M1 Limited - CIMB Research 2018-04-17: 1Q18 Growth In Mobile And Fixed Services

M1 Limited - CIMB Research 2018-04-17: 1Q18 Growth In Mobile And Fixed Services 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:
    1. other cost of sales (customer projects),
    2. staff cost (salary increments),
    3. facilities expenses (bigger network) and
    4. 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 | http://research.itradecimb.com/ 2018-04-17
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 1.850 Same 1.850



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