M1 (M1 SP) - Maybank Kim Eng 2018-04-02: Closer To Fair Value

M1 LIMITED B2F.SI

M1 (M1 SP) - Closer To Fair Value

With the M1 de-rating close to levels we envisage in our base case scenario of gradual erosion in incumbents’ revenues, we upgrade to a HOLD. However, it is still too early to be positive on the sector with new MVNOs and TPG set to launch in 2H18, and neither can we write off the worst case scenario risk we painted in our 13 March 2018 Sector Note: Singapore Telcos - TPG Scenarios ~ The Base, The Blue Skies & The Ugly.

Following TPG’s teaser announcement on 19 March 2018 offering free SIMs, unlimited voice and 3GB/month data for senior citizens for 24 months, the Singapore focused M1 share price has de-rated by 2% and has underperformed the STI by 25% on a 12-month basis.
Regardless of the fact that TPG’s segment is niche and that the full mechanics have not yet been revealed, we believe the market took it as a sign that TPG intends to put up a fight for share. By playing the good corporate citizen card, not only did TPG create public goodwill but we believe it also helps it to negotiate building and housing access for its nationwide coverage rollout by end-2018.

Per our base case scenario for the industry that TPG (TPM AU, Not Rated) and the various MVNOs attain a less than 10% industry wireless revenue share by 2019E, we think M1 is not yet at particularly compelling value levels yet.
We do note that cash dividend yields even in the 2019E pressure point may pique interest at 5% levels but note that we expect to drop subsequently due to competition.

Although TPG’s stated purpose at the onset was for only 5-6% market share, we cannot discount our worst case scenario that tariff wars ensue and a more aggressive market share grab takes place. Incumbents attempting to stay out and let MVNOs compete with TPG for a lower income segment is ideal but contamination is always possible.
Our sensitivity analysis shows that every 1% change in wireless revenue would impact M1’s 2019E core profits and Target Price by 3%.

A benign competitive environment or a hasty retreat by new entrants would be an unexpected surprise.
Growth in fixed network via fixed broadband and/or enterprise could provide earnings surprises in the medium to long term.
Any takeover interest by a new entrant or TPG could trigger a sector re-rating.

Should TPG resort to handset subsidies to poach subscribers an escalation in incumbents’ own efforts could take place.
Higher-than-expected capex pressure as a result of competition and/or 5G rollout.
Risks of a more rapid decline in wireless voice, SMS and roaming as data adoption gains momentum.

Luis Hilado Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2018-04-02

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