M1 - Maybank Kim Eng 2018-07-30: 1H18 In Line; 2H18 Outlook Sombre

M1 LIMITED SGX:B2F

M1 - 1H18 In Line; 2H18 Outlook Sombre

M1’s 1H18 results were in line with consensus and our expectation. Management guidance of lower profit in 2H18 affirms our expectation of a more challenging 2H.
We maintain our forecasts, DCF-based Target Price (WACC 4.1%, LTG -1%) of SGD1.63 and HOLD.
The industry’s fortune and how our assumptions will pan out will heavily depend on the extent and impact of competition. In the sector, we prefer StarHub (SGX:CC3) (Rating: BUY, Target Price: SGD1.96) whose de-rating has exceeded our base-case outlook.

M1’s 2Q18 revenue at SGD254m (flat q-o-q; +2% y-o-y) were squeezed by falling international revenue and handset sales offsetting growth in wireless service and fixed network/enterprise revenue.
1H18 revenue accounted for 47%/48% of MKE/FactSet consensus forecasts. 2Q18 EBITDA and profit were SGD78m and SGD36m, both up 4% q-o-q and 1% y-o-y); compared to MKE/consensus, 1H18 EBITDA represented 52%/52% and net profit 56%/55%. But management guided for lower y-o-y 2H18 profit due to expected new competition.

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On the bright side, the 5% q-o-q wireless service revenue growth was driven by both leasing fees from its unlisted MVNO partner Circles.Life and from the core business seeing subscribers exceeding data caps increasing to 34% in 2Q18 after three quarters of decline.
With management indicating the MVNO contract is volume based, we believe Circles’ latest promotions providing 1GB/month data combined with seasonal handset sales pick-up in 2H will bring revenues up to our forecasts.

As competition will intensify over the next 12-18 months, we cannot discount the risk to our base-case scenario of gradual revenue erosion for industry incumbents like M1. As such, maintain HOLD despite its 12-month underperformance against the STI.

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.

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 Research | https://www.maybank-ke.com.sg/ 2018-07-30

SGX Stock Analyst Report HOLD Maintain HOLD 1.630 Same 1.630