M1 Limited - CGS-CIMB Research 2018-07-30: 2Q18 Fixed Services & Mobile Postpaid Stand Out

M1 Limited - CGS-CIMB Research 2018-07-30: 2q18 Fixed Services And Mobile Postpaid Stand Out M1 LIMITED SGX:B2F

M1 Limited - 2Q18 Fixed Services & Mobile Postpaid Stand Out

  • M1’s 2Q18 results were in line. 1H EBITDA/core EPS was 49%/49% of our FY18 forecasts.
  • Mobile service revenue rose a robust 3.8% y-o-y (+3.8% q-o-q) in 2Q18. Fixed services revenue growth accelerated to 27.4% y-o-y (+15.0% q-o-q).
  • EBITDA margin eased 1.9% pts y-o-y due to higher revenue contribution from fixed services.
  • FY18F core EPS may rise by 7.6%, then fall by 23.1%/42.2% in FY19F/20F due to competition from TPG and 700MHz amortisation.
  • Maintain HOLD with a 19% lower DCF-based target price of S$1.50 (WACC: 7.1%).

2Q18 results largely met expectations

  • M1’s 2Q18 EBITDA inched up 0.5% y-o-y (+2.9% q-o-q) as revenue growth was mostly offset by higher cost. 2Q18 core EPS grew 0.8% y-o-y (+2.8% q-o-q), in line with EBITDA.
  • Results were largely in line, with 1H18 EBITDA/core EPS forming 49%/49% of our FY18F forecasts (consensus: 51%/56%). A DPS of 5.2 Scts was declared (2Q17: 5.2 Scts), implying 68% payout.
  • M1 guided for 2H18 net profit to be lower y-o-y due to higher marketing cost and the impending entry of a new competitor.

Robust mobile service revenue growth attributed to postpaid

  • M1’s 2Q18 mobile service revenue (76% of total service revenue) rose a robust 3.8% y-o-y (+3.8% q-o-q). This was mainly due to postpaid revenue, which rose 5.7% y-o-y (+4.2% q-o-q), driven by take-up of SIM-only plans (both from M1 and Circles.Life subs).
  • Prepaid revenue continued to fall, down 11.1% y-o-y (steady q-o-q) from keener competition as its competitors gave retailers aggressive incentives to acquire subs. q-o-q, the prepaid subs decline accelerated to 63k while postpaid net adds picked up to 34k.

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Fixed services revenue growth accelerates y-o-y

  • M1’s fixed services revenue (19% of total service revenue) growth accelerated to 27.4% y-o-y (+15.0% q-o-q) in 2Q18, its strongest growth since 2Q16. This was driven by contribution from corporate projects, several of which were completed in 2Q18.
  • Its fibre customer base increased 6k q-o-q but average revenue per user (ARPU) fell by 3.0% q-o-q (+4.6% y-o-y) to S$39 due to the take-up of basic lower ARPU plans by residential subs.

EBITDA margin eased 1.9% pts y-o-y

  • The EBITDA margin on service revenue declined 1.9% pts y-o-y (-0.6% pts q-o-q) to 40.1% in 2Q18 as lower-margin fixed services business in the revenue mix increased. M1 incurred higher:
    1. wholesale costs of fixed services (higher customer base),
    2. other cost of sales (customer projects), and
    3. staff cost (salary increments and corporate team expansion).
  • Net debt/EBITDA rose slightly to 1.27x (1Q18: 1.25x) from higher net debt.

Core EPS could grow 8% in FY18F before falling in FY19-20F

  • We keep our FY18F EBITDA but cut FY19F-20F by 5-14% to factor in a bigger 10% p.a. (previously: 5%) impact on the base mobile ARPU (ex-roaming) from more intense competition. We now expect EBITDA to rise 2.2% y-o-y in FY18F, then fall 12.5%/16.1% y-o-y in FY19F/20F.
  • No major core EPS changes for FY18F-19F (700MHz amortisation shifted to FY20F) but FY20F is reduced by 32.1%, in line with EBITDA cut. Maintaining 80% payout, FY18F/19F/20F DPS is now 12.7/9.7/5.6 Scts (previously: 12.4/9.7/8.3).

Maintain HOLD; 19% lower DCF-based target price of S$1.50

  • Sentiment on M1 could weaken further with more MVNO competition and TPG’s service launch in 2H18. If the share price falls significantly below S$1.50, it could represent a good entry point as we believe our target price has sufficiently factored in competition risk.
  • M1’s 11.8x FY19F EV/OpFCF is at a 13% discount to ASEAN telcos’.
  • Key upside/downside risk: better-/worse-than-expected impact from TPG’s entry.

FOONG Choong Chen CFA CGS-CIMB Research | https://research.itradecimb.com/ 2018-07-30
SGX Stock Analyst Report HOLD Maintain HOLD 1.50 Down 1.850