M1 (M1 SP) - UOB Kay Hian 2018-04-17: 1Q18 Higher Revenue Expended By Rising Costs

M1 (M1 SP) - UOB Kay Hian 2018-04-17: 1Q18 Higher Revenue Expended By Rising Costs M1 LIMITED B2F.SI

M1 (M1 SP) - 1Q18 Higher Revenue Expended By Rising Costs

  • Post-paid revenue expanded 4.3% y-o-y as post-paid subscriber base grew 2.7% y-o-y in 1Q18. 
  • Fibre broadband revenue increased 13.9% y-o-y, aided by a 5.3% y-o-y increase in ARPU. 
  • Unfortunately, growth in service revenue was negated by a 5.6% y-o-y increase in expenses for staff costs and 11.8% increase in facilities expenses.
  • The impending entry of TPG Telecom as the fourth mobile operator remains a major threat. 
  • Maintain SELL. Target price: S$1.60.



RESULTS

  • M1 reported a net profit of S$34.8m for 1Q18, unchanged compared with the corresponding quarter last year. 
  • Bottom line is boosted by a 6.4% y-o-y drop in depreciation with some 3G network assets already fully depreciated. This is the first set of results prepared based on SFRS (I) 15.

Mobile: Pre-paid disappointed. 

  • Post-paid mobile revenue expanded 4.3% y-o-y but prepaid revenue contracted 11.1% y-o-y. M1 added 12,000 post-paid subscribers q-o-q, predominantly for SIM-only plans and MVNO customers, and its post-paid subscriber base expanded 2.6% y-o-y. 
  • Post-paid ARPU declined 2% y-o-y to S$54.60. Excluding revenue allocated to handset sales, ARPU based on SFRS (I) 15 would have been stable at S$41. 
  • M1 lost 59,000 pre-paid subscribers due to competitors offering incentives to retailers. Pre-paid ARPU dropped 10% y-o-y to S$9.90 due to declining usage for voice.
  • Average data usage increased 22% y-o-y to 4.5GB, boosted by Upsized Data (add-on option). Data accounted for 61.3% of post-paid mobile revenue (1Q17: 54.0%).

Fixed services: Slowdown in net additions. 

  • M1 added 5,000 fibre broadband subscribers q-o-q, compared with 8,000 in the corresponding quarter last year. Its fibre broadband subscriber base expanded 15.5% y-o-y. ARPU increased 5.3% y-o-y to S$43.70 due to growing contributions from corporate and government segments.

EBITDA margin receded y-o-y. 

  • EBITDA margin narrowed 2.2ppt y-o-y to 40.8%. 
  • Staff costs increased 5.6% y-o-y due to salary increments. Facilities expenses also increased 11.8% y-o-y.


STOCK IMPACT


Guidance for 2018. 

  • Management did not provide guidance for net profit for 2018. This is a reflection of heightened uncertainties due to the impending entry of TPG Telecom as the 4th mobile operator in Singapore in 2H18. Pricing erosion is inevitable.

Capex is expected to be at S$120m. 

  • Management intends to maintain a dividend payout ratio at 80% for 2018. Adoption of SFRS 15 results in tax payable of S$13m.
  • Timing of payment for income tax has yet to be finalised.

Opportunities in corporate ICT and digital services. 

  • M1 will expand into corporate ICT and digital services to enhance future growth. It could layer its managed services and fixed & mobile connectivity on top of its ICT solutions.
  • Management intends to focus on three areas: 
    1. Managed infrastructure and cyber security. M1’s unified operations monitoring centre (UOMC) helps monitor trends for real-time information to deliver predictive information for equipment and systems failures, and proactive resolution of issues for enterprise customers.
    2. Smart Nation solutions, which require ultra-high-speed and narrowband internet-of-things (NB IoT) connectivity. M1 plans to provide retail solutions (mobile point-of-sale (mPOS), digital signage and video & data analytics) and transport solutions (fleet management and cargo tracking).
    3. Cloud computing and data analytics. M1 plans to provide hybrid cloud solutions in partnership with AWS, partner application developers to offer cloud-based software-as-a-service (SAAS) and big data solutions using telco data.

M1 partners Keppel Electric to offer new power options. 

  • M1 is collaborating with Keppel Electric, who is a participating retailer in the Jurong Open Electricity Market (OEM) soft launch, on joint product bundling. From 24 Mar 18, customers residing in Jurong will be able to sign up for attractive electricity plans offered by Keppel Electric at the M1 Shop located at IMM Jurong to enjoy exclusive bundled offers and discounts during the Jurong OEM soft launch. 
  • New and re-contracting mobile customers can sign up for attractive electricity plans in-store and enjoy S$80 off Samsung Galaxy S9 and S9+, or a free 6 months of Upsized Data worth S$35.40.


EARNINGS REVISION/RISK

  • We reduced our net profit forecast for 2018 by 2.5% as:
    1. we assumed a tax payable of S$13m due to adjustment to the opening balance for retained earnings for 2018 is paid in 4Q18; and
    2. our projection for depreciation was reduced by 1.8%.


VALUATION/RECOMMENDATION

  • Our target price of S$1.60 is based on DCF (COE: 8.5%, terminal growth: 1.0%).


SHARE PRICE CATALYST

  • Damage from impending entry of TPG Telecom in 2018.
  • Savings in capex from sharing of mobile infrastructure with StarHub.




Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2018-04-17
UOB Kay Hian SGX Stock Analyst Report SELL Maintain SELL 1.600 Same 1.600



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