M1 - DBS Research 2018-06-27: Steady Revenue Share Loss Is Priced In

M1 LIMITED SGX: B2F

M1 - Steady Revenue Share Loss Is Priced In

Better placed than StarHub due to its non-reliance on Pay TV, cheaper mobile pricing and a proven MVNO partner.
M1 should be valued at 12-month forward EV/EBITDA of 6x vs 7x regional average.
Maintain HOLD with a lower Target Price of S$1.46.

We now project 4% annual decline in the mobile sector over 2018-2022 vs 1% earlier to reflect growing adoption of cheaper SIM-only plans and aggressive mobile virtual network operators (MVNOs) & TPG potentially.
M1 is likely to see an annual EBITDA contraction of 3% over FY17A-20F vs. 4% for StarHub due to its non-reliance on bundling with Pay TV service and a proven MVNO partner.
We argue that M1 should trade at 12-month forward EV/EBITDA of 6x, at a 15% discount to the regional average of 7x.

Consensus expects M1 to lose more revenue share than its peers to TPG, which we think is unlikely due to its M1’s partnership with Circles.Life and its more competitive SIM-only plans.
We also don’t think 700MHz spectrum will be available before 2H19 as Malaysia & Indonesia use this spectrum for Analogue TV, thus causing interference. As such, we don’t project any amortisation of the S$180m spectrum price over the next 12 months at least.

Growth in the fixed services segment and signs of a stabilising mobile segment, buttressed by contributions from Circles.Life.

Maintain HOLD with a revised Target Price of S$1.46.
Due to lack of clarity on future free cash flows, we switch to peer multiple-based valuation. We value M1 at 12-month forward EV/EBITDA of 6x, at ~15% discount to the 7x regional average.

Bear-case Target Price is S$1.20 if TPG causes severe disruption. M1 could see a 10% drop in FY19F EBITDA this scenario vs our base case of 4% drop. We use 5.4x 12-month EV/EBITDA to derive our bear-case TP.
Operational challenges at TPG forcing it to delay the launch by 12-months or more may lead to bull-case Target Price of S$1.89. M1 could see 2% drop in FY19F EBITDA under this scenario vs our base case of 4% drop. We use 6.6x 12-month EV/EBITDA to derive our bull-case Target Price .

We expect the Singapore mobile industry to decline ~18% from the current levels by 2022, recording an annual decline of 4% from FY17-22F, on the back of rising adoption of SIM-only plans and an aggressive TPG. After factoring in the impact of SIM-only plans and potential subscriber poaching from MVNOs and TPG, we believe that M1 will record revenue share losses of ~1.3% over 2017-2022 vs. 2.5% for StarHub.
Growing contributions from Circles.Life, M1’s MVNO partner, and M1’s cheaper mobile SIM only plans with equipment should allow M1 to minimise revenue share losses over the period in our view. With the potential ARPU dilution from SIM-only plans and subscriber losses, we project for a 4% annual decline in M1’s mobile revenues over 2018- 2022, in line with our industry base case, vs. 3% earlier.

We expect growing contributions from M1’s fixed and IoT segments to offset declines in the mobile segment, allowing M1 to expand its overall topline despite the 4% projected annual decline in the mobile segment. We expect fixed and IoT revenues to double their contribution from 12% currently to 24% by FY20F, much of it derived from the fast- growing IoT segment.
The success of M1’s partnerships with digital solution companies to capture opportunities in the Smart Nation project powered by IoT should allow M1 to expand its topline further going forward. We project that IoT will contribute to ~10% of total revenue and generate ~10-15% operating margins in FY21. However, given the low EBITDA margins of these services, we do not expect the incremental EBITDA contributions from these segments to be substantial enough to offset the potential impact of declines in the mobile segment on M1’s EBITDA. As such, we expect a 2.7% annual decline in M1 EBITDA over FY18-20F.

Even though M1 has maintained its dividend payout ratio at ~80% over the last three years, the absolute dividend per share has declined due to the fall in earnings of the carrier.
NB-IoT initiatives and fixed services revenue failing to meet revenue expectations due to competition and low enterprise customer net additions, coupled with potential cost escalations (staff- and project-related costs to grow enterprise business) causing earnings to decline further, which could result in lower dividends.

Sachin MITTAL DBS Vickers | https://www.dbsvickers.com/ 2018-06-27

SGX Stock Analyst Report HOLD Maintain HOLD 1.460 Down 1.760