M1’s Transformation Plan - UOB Kay Hian 2019-10-25: A Connectivity Solutions Provider

M1 | SGinvestors.io NETLINK NBN TRUST (SGX:CJLU) SINGTEL (SGX:Z74) STARHUB LTD (SGX:CC3)

M1’s Transformation Plan - A Connectivity Solutions Provider

  • M1 intends to harness the synergies of being part of the Keppel Corp to enhance its B2C and B2B (S$16b market) offerings, strengthen its digital capabilities and explore new markets. Targets include increasing subscriber market share (24.2% currently), reducing overall opex and offering an ROE of 25% as competition remains intense, although there is inherent ARPU upselling potential with the Keppel Corp.
  • Maintain MARKET WEIGHT; top pick is defensive NetLink Trust (SGX:CJLU) with attractive dividend yield of 5.5%.



WHAT’S NEW


M1: A provider of connectivity solutions within Keppel Group.

  • KEPPEL CORP (SGX:BN4) believes that M1’s privatisation (on Mar 19) was an opportunity to turn around a business that Keppel Corp knows well (founding investors of M1 in mid-90s). Since the start of the year, a new team has been introduced, notably CEO Mr Manjot Singh Mann, to accelerate M1’s transformation. Key changes to-date include:
    1. increase net adds through B2C tariffs within Keppel Corp,
    2. increase share of transactions via digital channels,
    3. physical channel cost reduction, and
    4. improved internal processes such as fixed line activation.
  • See Keppel Corp's announcement titled "Briefing to Analysts: Update on M1's Transformation, 23 Oct 2019".
  • 5G puts M1 in a leading position to capitalise on various business cases given its broad-based businesses in Singapore.
  • M1’s near-term focus includes increasing subscriber market share (24% currently) and reducing overall opex. M1’s ROE target is 25% (2018: 25.8%) as competition remains intense albeit inherent ARPU upselling potential with the Keppel Corp. Service revenue will continue to be adversely affected by SIM-only plan competition in the market.





Transformation through 4 major themes.

  • M1 will harness synergies of being part of the Keppel Corp to enhance its B2C and B2B offerings, strengthen its digital capabilities and explore new markets. M1 aims to strengthen its current offerings (eg OnePlan) and develop new markets. Anecdotally, Keppel Corp announced that following the launch of M1’s OnePlan in May, more than 50,000 new customers have signed up for the plan. In addition, good customer engagement has led to a higher net promoter score (NPS) vs peers.

Balance sheet optimisation.

  • An asset-light business model. Without going into details, Keppel Corp highlighted that balance sheet optimisation is being planned. This will result in an asset-light model to improve ROE and free up cash for other investments. Key ideas include asset separation (which requires regulatory approval) or asset sharing among telco players (sharing of passive infrastructure like base stations).


ACTION


Maintain MARKET WEIGHT, seek shelter in NetLink NBN Trust (Netlink).

  • In the absence of key re-rating catalysts for the sector, we take a cautious outlook amid heightened mobile competition, given the entry of more mobile virtual network operators (MVNOs). Our top pick in the sector is NetLink Trust – it provides a defensive shelter amid external volatility, in our view. The sector currently trades at 21x 2019F PE and 17x 2020F PE.

NetLink NBN Trust (BUY/Target: S$1.01)

  • NetLink Trust provides a defensive shelter on the back of high barriers of entry (with 90% of earnings recurring in nature) and as a potential beneficiary of TPG’s mobile coverage expansion. While NetLink Trust’s call for a Single Wholesale Network would not be enforced in Info-communications Media Development Authority’s (IMDA) revised 5G policy, the company remains a clear beneficiary of the 5G roll-out on the back of:
    1. higher connections and higher installation-related revenue, and
    2. the onus of rolling out 5G network lies on the mobile network operators (MNO).
  • Importantly, we expect demand for non-building address point (NBAP) connections to gear up should the government accelerate the roll-out of Smart Nation initiatives. The stock offers a 5.5% sustainable dividend yield.
  • See NetLink Trust Share Price; NetLink Trust Target Price; NetLink Trust Dividend History.


ESSENTIALS


Sliding ARPU amid intense competitive pressure…

  • In 1H19, SingTel (SGX:Z74) led with a subscriber market share of 50% while StarHub (SGX:CC3) and M1 held a 26% and 24% share of the pie. In terms of net adds, SingTel and StarHub added 35,000 and 39,000 post-paid subscribers respectively owing to the inclusion of their on-going SIM-only plans (GOMO and GIGA). M1 recorded a 5x increase in net adds in 2Q19.
  • That said, SingTel and StarHub reported y-o-y declines in post-paid ARPU to S$40/month (SingTel: -13%; StarHub: -11%) as a result of declining voice revenue and roaming usage, as well as the proliferation of SIM-only post-paid plans from the MVNOs. We understand M1 experienced a similar trend.

...with entry of another 1-2 MVNOs in the near term.

  • Broadly, we expect competition to remain intense in Singapore with the potential entry of another 1-2 MVNOs in the near term. The recent Circles.Life’s “S$5 for 2GB” plan – on the surface suggests bite-sized offerings but our recent meetings with telcos seem to suggest that prices have stabilised in Singapore at around the S$18-20/month range without massive data discounting practices. Instead, telcos are finding niche opportunities like bite-sized offerings for low data users and segmented target packages.

TPG losing grip with entry of MVNOs.

  • Separately, we note that TPG remains on track to deliver its coverage milestone having spent A$147m (S$139m) in aggregate capex for Singapore’s roll-out (vs planned capex of A$200-300m). It currently has 300,000 subscribers on its free SIM plan.
  • Given incumbents’ grip on premium customers and the proliferation of MVNOs in Singapore, it will make it difficult for TPG to gain significant leverage in the SIM-only segment.


RISKS

  • Key risks for the sector include:
    • intense competition and worsening pricing erosion due to the entry of TPG (the fourth telco) and new MVNOs,
    • elevated capex spending with revenue capped in the case of no network sharing, and
    • lack of 5G use cases.


SECTOR CATALYSTS


5G opportunities

  • Mobile operators are actively monitoring the development of the 5G network in Singapore and are looking forward to exploring opportunities associated with new market developments (eg cloud gaming, Internet of Things, autonomous vehicles and etc.)
  • Roll-out of 5G would result in industry consolidation, such as 5G network JVs by StarHub and M1.
  • Efforts on monetising growing data usage by the telcos.





Chong Lee Len UOB Kay Hian Research | Chloe Tan Jie Ying UOB Kay Hian | https://research.uobkayhian.com/ 2019-10-25
SGX Stock Analyst Report BUY MAINTAIN BUY 1.010 SAME 1.010
HOLD MAINTAIN HOLD 3.320 SAME 3.320
SELL MAINTAIN SELL 1.450 SAME 1.450



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