M1 (M1 SP) - Maybank Kim Eng 2018-04-17: 1Q18 In(line) With The New

M1 (M1 SP) - Maybank Kim Eng 2018-04-17: 1Q18: In(line) With The New M1 LIMITED B2F.SI

M1 (M1 SP) - 1Q18: In(line) With The New


In line but with muted expectations; Prefer SingTel 

  • Despite some variances due to implementation of new contract accounting standards, we believe M1’s 1Q18 results were in line with low expectations (ours and consensus). Increasing competition in the wireless space is likely to constrain the operational and M1's share price performances
  • We maintain our forecasts, DCP-based Target Price of SGD1.63, and HOLD rating unchanged. 
  • We prefer Singtel (Rating: HOLD, Target Price SGD3.69), which has a more regionally diversified structure.



No FY18 revenue or EBITDA guidance 

  • MKE/consensus forecast a 4%/6%% decrease in net profit in 2018 Management has not provided revenue or EBITDA guidance for FY18. 
  • M1’s 1Q18 revenue at SGD254m (-16% q-o-q, +1% y-o-y) was 24% of MKE and FactSet consensus FY18 forecasts. Revenue for the fixed network business increased 14% y-o-y from new corporate and government contracts, which provided a bright spot against weakness in international calls and mild growth in wireless service revenue. 
  • The 1Q’18 EBITDA of SGD75m (-1% q-o-q, -2% y-o-y) and profit of SGD35m (+9% q-o-q, flat y-o-y) accounted for about 26% and 28% of 2018E for MKE and Consensus.


Accounting changes have less impact on M1 

  • The implementation of SFRS 15 on contract reporting standards has had less of an impact on M1’s reported profits than its peers because it had been employing a similar standard for its iPhone accounting.
  • Nonetheless, the material change in how handset revenues and costs are now reported. Management guided for a SGD13m one-time, cash-tax impact from the change, but otherwise, operating cashflows remain similar, and thus we maintain our DCF-based Target Price (WACC 4.1%, LTG -1%) of SGD1.63.


Maintain HOLD; Competition will be key swing factor 

  • With the number of competitors increasing over the next 12-18 months we cannot discount the risk to our base-case scenario of gradual revenue erosion for M1. As such, we maintain our HOLD rating despite its 12-month underperformance against the STI. 
  • The major risk factor to our view is the uncertain impact to industry participants from increasing competition. .


Summary of accounting change impact to Singapore telco industry 

  • The SFRS 15 (based on IFRS 115) accounting standard that revises contract accounting standards is being implemented by Singapore companies starting this quarterly reporting period but applied retroactively to January 2017 financial statements. Prior end-December 2017 disclosures are thus not a fair comparison and will be restated.
  • As Singapore telco businesses are significantly equipment contract based the implementation has material impact on the timing of revenue recognition.
  • Before revenues recorded mirrored customer billing and cash received but with the new standard revenues will be front loaded with the theoretical standard selling price (SSP) as customers sign (what used to be called subsidy based) contracts. Service revenues (and ARPU) will take the optical hit from this change.
  • Reported ARPU for 2017 and onwards will be significantly lower as revenue is shifted to equipment revenue from service revenues. Revenues will also be front loaded during period of equipment contracting signing and now optically there will be no equipment subsidies as SSP will be higher than handset cost.
  • For Singapore telcos with calendar 4Q being the typical period of re-contracting with new handset launches this means it will optically be a period of high equipment sales and low service revenues.
  • Operating cashflows are not materially impacted as long as billing and collection procedures remain at current practice. There is a cash-tax impact from retained earnings changes, caused by the restatement of revenues and profits retroactive to 2017.


Impact specific to M1 

  • Consistent with the general industry expectations discussed above, the most material change to M1’s income statement post SFRS 15 has been the restatement of service revenues and handset sales.
  • The net impact is that instead of substantial handset subsidies under prior accounting, the handset business is now shown as nearly break-even.
  • The change in 4Q17 showing a 3% profit uplift against the prior method reflects the more significant handset-based recontracting efforts during the period. Meanwhile, a leaner recontracting period in 1Q is reflected in restated 1Q17 being 4% lower than the prior accounting method.
  • Based on M1’s full-year 2017 comparison for revenue, EBITDA and profit the new accounting standard results in -2%, +3% and +4%, respectively, compared to the prior accounting method.
  • Note that M1 had already been employing a methodology similar to SFRS 15 for its iPhone contract accounting and thus the changes impacted non-iPhone accounting. As such, it is possible that the impact will be more material to its industry peers.



Swing Factors


Upside

  • 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.

Downside

  • 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/ 2018-04-17
SGX Stock Analyst Report HOLD Maintain HOLD 1.630 Same 1.630



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