M1 - CGS-CIMB Research 2019-01-29: 4Q18 Not A Rosy Quarter

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M1 LIMITED (SGX:B2F)

M1 - 4Q18 Not A Rosy Quarter

• Core EPS fell 20.2% y-o-y in 4Q18. Results missed our expectations.
• Mobile service revenue fell y-o-y for the first time in four quarters.
• Maintain HOLD; target price unchanged at S$2.06, based on the VGO price.

Results missed our expectations on high opex

• M1 LIMITED (SGX:B2F)'s 4Q18 EBITDA fell 11.2% y-o-y (-12.4% q-o-q) on lower service revenue and higher opex. 4Q18 core EPS fell a bigger 20.2% y-o-y (-28.2% q-o-q), further dragged down by higher effective tax rates.
• Results were below our expectations, with FY18 core EPS 10% lower than our forecast (but in line with Bloomberg consensus).
• Key variance: higher-than-expected opex. 2H18 DPS of 6.0 Scts (2H17: 6.2 Scts) brought FY18 payout to 79%.

Mobile service revenue fell y-o-y for the first time in four quarters

• M1's 4Q18 mobile service revenue (74% of total service revenue) fell y-o-y for the first time in four quarters, down 2.7% (-2.1% q-o-q).
• Despite a growing subscribers base, postpaid revenue eased 1.5% y-o-y (-1.8% q-o-q), on lower average revenue per user (ARPU). Prepaid revenue continued to fall, down 13.8% y-o-y (-5.3% q-o-q) on further ARPU erosion, though the subs decline moderated to 12k (-2.1% q-o-q) in 4Q18.

Fixed services revenue largely flat q-o-q over the past three quarters

• Fixed services revenue (20% of total service revenue) was up 8.6% y-o-y in 4Q18, but has been largely flat q-o-q over the past three quarters.
• M1's fibre customer base increased 5k (+2.5%) q-o-q and ARPU was steady q-o-q (-2.8% y-o-y). Hence, we believe contribution from corporate projects likely softened q-o-q after a strong performance across 1Q18-3Q18.

Weaker EBITDA margin

• M1's EBITDA margin on service revenue declined 3.8% pts y-o-y (-4.5% pts q-o-q) to 35.9% in 4Q18. This was mainly due to:
  1. higher handset sales,
  2. other cost of sales (customer projects), and
  3. staff cost (salary increments, corporate team expansion and consolidation of a newly acquired subsidiary).

Declining earnings outlook in FY19-20F

• Post our minor revisions, we forecast M1’s core EPS to decline 17.1%/38.0% y-o-y in FY19/20F. This is mainly to reflect declining mobile revenue on the back of more intense competition sparked off by TPG’s commercial service launch, which is expected by mid- 2019. We have assumed mobile ARPU (ex-roaming) will fall 10% p.a. in FY19-20F.

Maintain HOLD with unchanged target price

• We maintain our HOLD call and target price of S$2.06, based on the voluntary general offer (VGO) by its major shareholders KEPPEL CORPORATION LIMITED (SGX:BN4) and SINGAPORE PRESS HLDGS LTD (SGX:T39). We think Axiata is unlikely to make a counterbid at a much higher price.
• M1’s 14.5x FY19F EV/OpFCF is at a 4% premium over the ASEAN telco average.
• Key downside risk to our call is insufficient acceptance for the VGO.
• Key upside risk is an aggressive counterbid from Axiata.

FOONG Choong Chen CFA CGS-CIMB Research | https://research.itradecimb.com/ 2019-01-29

SGX Stock Analyst Report HOLD MAINTAIN HOLD 2.060 SAME 2.060