M1 - UOB Kay Hian 2018-10-25: 3Q18 Continued Growth From Fixed Services

M1 LIMITED (SGX:B2F) | SGinvestors.io M1 LIMITED (SGX:B2F)

M1 - 3Q18: Continued Growth From Fixed Services

  • M1 reported a net profit of S$34.4m for 3Q18, down 5.2% y-o-y and in line with our expectations.
  • Revenue from its fixed services business grew 26% y-o-y with continued expansion of its fibre broadband subscriber base and contributions from IT solutions for enterprise customers.
  • We judged that the probability of a counter offer from Axiata Group has diminished due to the 26% collapse of Axiata’s share price in October.
  • ACCEPT OFFER from Konnectivity Pte Ltd as offer price of S$2.06 is fair.



3Q18 RESULTS

  • M1 reported a net profit of S$34.4m for 3Q18 (-5.2% y-o-y), which is in line with our forecast.


Mobile: Maintained healthy net paid.

  • M1 added 24 post-paid subscribers, driven by its own new customers and those from MVNO Life. Its post-paid subscriber base expanded 71% y-o-y. 
  • Post-paid ARPU declined 29% q-o-q. 82% of post-paid customers are on which 33% exceed their data accounted for 6% of its mobile service revenue.
  • M1 lost 41,000 pre-paid subscribers, the third contraction. Its paid subscriber base shrunk 20.7% y-o-y. 
  • Pre-paid ARPU was stable at S$1050.

Fixed services: Main engine of growth.

  • M1 added 4,000 fibre broadband subscribers in 3Q18 (2Q18: 6,000). Its fibre broadband subscriber base expanded 12.3% y-o-y. ARPU also increased by 4.4% y-o-y.
  • We estimate that IT solutions for enterprise customers contributed revenue of S$11.9m, representing an increase of 49% y-o-y. Contribution from fixed services accounted for 19.9% of total service revenue.

EBITDA margin has stabilised.

  • EBITDA margin narrowed 2.3ppt y-o-y but was stable q-o-q at 40.6%.
  • Staff costs increased 4.1% y-o-y while facilities expenses increased 8.5% y-o-y.
  • Traffic expenses decreased by 26.5% y-o-y due to lower retail traffic.


STOCK IMPACT

  • M1 did not hold its usual results briefing due to the on-going pre-conditional voluntary general offer by Konnectivity Pte Ltd.

ACCEPT OFFER.

  • The offer price of S$2.06 is fair given that:
    1. M1 would be the biggest casualty of increased competition from TPG Telecom as mobile accounted for 75% of its total service revenue in 3Q18,
    2. By tendering their M1 shares to Konnectivity, investors avoid a painful period of intense competition and ARPU erosion that would occur in 2019 and 2020, and
    3. We expect consolidation of the mobile industry from four to three players to materialise in 2021 or beyond. Holding on to M1 shares would subject investors to a long wait before industry consolidation materialises.
  • At the offer price of S$2.06, M1 is valued at PE of 13.2x and EV/EBITDA of 7.2x based on the financial performance in 2018. The offer price is also at a 26% premium to the last closing price and 30% premium to 1-month VWAP.

Probability of counter offer from Axiata diminished.

  • Axiata Group’s share price collapsed by 27% to RM3.33 in October. The correction could have been triggered by uncertainties over telecommunications policy domestically. We believe the crash in share price reduces the probability that Axiata would mount a counter bid for M1.

The fastest mobile network in Singapore.

  • According to IMDA’s IMconnected 1H18 report, M1 achieved the fastest 4G peak throughput speed of 262.5Mbps and fastest 4G median throughput speed of 43.2 Mbps in Singapore. It also achieved the lowest 4G latency of 47.7ms, a measure of the responsiveness of M1’s mobile network, which is crucial to enterprise cloud-based applications.


EARNINGS REVISION/RISK

  • We maintain our existing earnings forecast.


VALUATION/RECOMMENDATION

  • Our target price of S$2.06 is based on the offer price from Konnectivity Pte Ltd.


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/ 2018-10-25
SGX Stock Analyst Report ACCEPT OFFER MAINTAIN ACCEPT OFFER 2.060 SAME 2.060



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