M1 – OCBC

High yield defensive play

Good results due to lower costs and interest expenses. MobileOne (M1) recently delivered a good set of 3Q07 results. Revenue came in at S$200.2m (flat QoQ, +5.8% YoY) with net profit at S$43.6m (+8.0% QoQ, +1.6% YoY). The stronger sequential bottom-line was due to lower operating expenses (specifically due to lower handset costs) and borrowing costs (due to debt repayment).

Number portability likely in 1H08. Moving into 2008, M1 expects mobile number portability (MNP) to be introduced by 1H08. Prior to MNP introduction by regulators, the market place is likely to heat up with the 3 telcos attempting to tie up customers with attractive promotions. Presently, we are seeing some evidence of pre-MNP competition. More importantly, this in turn is likely to raise acquisition and retention costs, thus eroding margins even more. However, unlike its rivals, M1 does not offer many other services to spread its costs. As such, we see MNP to be negative to M1.

Opportunity for wireless broadband. In order to capitalize on the broadband market growth, M1 has launched its High-Speed Packet Access (HSPA) which is a wireless broadband system piggybacking on its 3G network. The new system will offer downlink of 3.6Mbps or 9-10 times faster than current speed. However, the window of opportunity on its mobile system could be short-lived with the roll-out of the free wireless broadband access under the proposed National High Speed Network. Indeed with M1’s introduction of its wireless broadband, its rival has recently also launched similar offering.

M1 is a defensive yield play. M1 has underperformed over the last 12 months losing over 8% in capital value. We believe the key reason is due to its inability to grow and that is as a result of its limited telco service offerings. M1 remains a very profitable business with ROE of over 21% (compared to SingTel’s 4.8%), albeit mature and with not much growth. However, its key attraction remains its very generous dividend policy of paying out at least 80% of profits. For FY08, we project a payout of 15 cents giving investors a return of about 8%. This together with a potential upside of about 20% to our fair value of S$2.33 makes M1 a very attractive and defensive proposition. We maintain our BUY rating.

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