M1 LIMITED
SGX:B2F
M1 - 2Q18 Calm Before The Storm
- M1’s 2Q18 results were marginally better than our forecast. It added 34,000 post-paid mobile customers, boosted by Circles.Life’s launch of its S$0 Flexi Plan in May.
- Post-paid ARPU recovered 1.8% q-o-q due to seasonality and growth from data. We expect TPG to launch commercial services in September and competition to intensify in 4Q18.
- Management expects earnings to decline in 2H18.
- Maintain SELL. Target price: S$1.55.
2Q18 RESULTS
- M1 reported a net profit of S$36.2m in 2Q18, marginally better than our forecast of S$34.3m.
Mobile: Hefty net additions boosted by Circles.Life.
- M1 added a sizeable 34,000 post- paid customers in 2Q18. These new customers were a combination of M1’s own customers and those from MVNO Circles.Life but management did not disclose the breakdown. Circles.Life launched its new S$0 Flexi Plan on 22 May 18, which provides 1GB of data, 30 mins of local talk time, 10 SMS and caller ID for free. Circles.Life would have contributed substantially to M1’s net additions during the quarter.
- Post-paid ARPU declined slightly by 0.4% y-o-y but increased 1.8% q-o-q to S$55.60. 34% of customers on tiered data plans exceeded their primary data bundle (1Q18: 29%). Average usage of data increased 33% y-o-y to 5.2GB. Data Passport also contributed positively as well. Data contribution to mobile services revenue surged to 64.4% (1Q18: 61.3%). Contributions from voice and SMS were reduced to 35.6% of mobile service revenue.
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Fixed services: Slowdown in net additions.
- M1 added 6,000 fibre broadband subscribers q-o-q. Its fibre broadband subscriber base expanded 13.6% y-o-y. ARPU was stable y-o-y but receded 2.5% q-o-q to S$42.60 due to increased take-up of basic plans. We estimate that IT solutions for enterprise customers contributed revenue of S$11.5m. Contribution from fixed network services accounted for 19% of total service revenue.
EBITDA margin receded y-o-y.
- EBITDA margin narrowed 1.5ppt y-o-y but was stable q-o-q at 40.6%. Staff costs increased 6% y-o-y due to salary increments and expansion of the team targeting enterprise customers. The increase in wholesale costs of fixed services (expansion of fibre broadband customer base) was offset by a decline in traffic expenses (less iDD calls).
STOCK IMPACT
Expect lower hoh earnings in 2H18.
- Management guided that net profit for 2H18 would be lower than 1H18’s due to seasonality and impending new competition. M1 did not state its usual commitment to maintain dividend payout ratio at 80% in its results presentation slides. Capex is expected to be at S$120m.
- M1 has declared interim dividend of 5.2 cents.
Calm before the storm.
- We maintain our defensive stance as we brace ourselves for the impending entry of TPG as the fourth mobile operator. Based on our channel checks, we anticipate that TPG would launch commercial services in Sep 18. TPG plans to offer senior citizens aged 65 and above 3GB of data and unlimited local calls free for the first 24 months. The move signals its intention to utilise low pricing as a lever to gain market share. Thus, we expect competition to intensify starting 4Q18.
- Phase 1 of the 5G standard was completed in Jun 18 and phase 2 is scheduled to be completed by Dec 19. Telcos could start deploying their 5G networks in 2020. Management intends to rollout its 5G network progressively on an on-demand basis.
Conducts 5G small cell trial with Nokia.
- M1 and Nokia plan to conduct Nokia’s first 5G small cell trial in Southeast Asia. The findings from this live trial will provide valuable practical learnings for deployment of 5G small cells in dense cell grid architecture and operating at very high 5G frequency bands. 5G technology is capable of delivering theoretical peak download throughput exceeding 20Gbps.
Demonstration of 5G media with Huawei.
- One potential 5G use case is the live streaming and broadcasting of virtual reality (VR), augmented reality (AR) and mixed reality (MR) content. Many companies have developed creative content using immersive media such as VR/AR/MR for training, education, corporate communication, marketing campaigns, public events and virtual tourism. M1 and Huawei plan to jointly showcase live 360-view VR content broadcast. This is an end-to-end live 5G trial using Huawei equipment operating at the 28GHz frequency band.
EARNINGS REVISION/RISK
- We raise our 2018 net profit forecast by 2.8% after factoring in the better 2Q18 results.
VALUATION/RECOMMENDATION
Maintain SELL.
- Our target price of S$1.55 is based on DCF (COE: 8.75% (previous: 8.5%), terminal growth: 1.0%).
- We have increased our risk-free rate from 2.5% to 2.75%.
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 Research
|
https://research.uobkayhian.com/
2018-07-30
SGX Stock
Analyst Report
1.55
Down
1.600
