M1 Ltd - RHB Invest 2018-04-17: Distorted By SFRS 15

M1 LIMITED B2F.SI

M1 Ltd - Distorted By SFRS 15

M1’s 1Q18 results were broadly in line with expectations, though its financial numbers were distorted by the implementation of SFRS 15 (effective 1 Jan 2018). Fixed services remained the bright spot, with mobile revenue momentum supported by Circles.Life.
We maintain our NEUTRAL rating and DCP-derived Target Price of SGD1.95 (9% upside) (WACC: 8.5%, TG: 1.5%). EV/EBITDA valuations are 1SD below its historical mean, backed by a prospective dividend yield of > 6%.

Key risks are competition, higher-than-expected capex, and negative dividend surprises.

1Q18 core earnings – based on Singapore Financial Reporting Standard 15 (SFRS 15) Revenue from Contracts with Customers – grew by 8.4% q-o-q (flat y-o-y) to SGD34.7m, mainly from lower depreciation charges and seasonally lower opex. This formed 29% of our and consensus estimates (pre-SFRS 15), which we deem broadly in line given the more intense competition expected in 2H18 (entry of TPG Telecom) and margin pressure.
Overall, the results were distorted by the restatement of its financial numbers based on the new accounting standard, with the absence of pre-SFRS 15 comparables for the quarter impeding a more meaningful assessment of the underlying impact. The effect is seen to be incremental for M1, which already practises fair value accounting for the iPhone bundled contracts.

The decline in M1’s prepaid revenue accelerated to 6% q-o-q in 1Q18, from -4% q-o-q in 4Q17 on the back of lower usage and the sharp 59,000 net-deletion in its prepaid base. This led to the 5% decline in prepaid ARPU to SGD9.90. Management attributed the spike in churn to costly incentives offered by rivals to grab market share during the quarter, where it chose not to reciprocate.
Postpaid revenue rose 4.3% y-o-y, supported by its mobile virtual network operator (MVNO) Circles.Life (CL), and the robust 12,000 q-o-q postpaid subs growth. Postpaid APRU however slipped 3.2% q-o-q, due to the dilution from SIM-only plans, which now make up some 12% of its postpaid base. Average postpaid data usage widened to 4.5GB per sub/month in 1Q18, from 4.3GB per sub/month in 4Q17 (1Q17: 3.7GB), with mobile data contribution inching higher to 61.3% from 58.2% in 4Q17.

This was driven by 5,000 net-additions in its fibre customer base (+3% q-o-q) to 194,000, and steady ARPU of SGD43.7. Fixed services remained the second largest contributor to service revenue (after mobile services), at 17% in 1Q18.
Capex reaffirmed at SGD120m for FY18, with major project-related capex already incurred in FY17. We view this as providing some headroom for dividends, where the payout guidance has been maintained at 80%.
Key risks are competition from the fourth mobile entrant (TPG Telecom), which is slated to roll out its service in 2H18, higher-than-expected capex, and negative dividend surprises.

Singapore Research RHB Invest | http://www.rhbinvest.com.sg/ 2018-04-17

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