M1 – OCBC
Steady State in 2008
Bigger margin compression in 4Q07. Although MobileOne (M1) posted 4Q07 revenue of S$206.9m (+2.9% YoY, +3.3% QoQ) which came in 16.5% ahead of our forecast of S$177.6m, net profit of S$37.9m (-4.8% YoY, – 13.1% QoQ) fell about 9.4% from our S$41.9m estimate, damped by higher cost of sales. This was mainly due to a 122.9% YoY jump in leased circuit costs to S$10.7m to accommodate the increase in data traffic following the introduction of its mobile broadband services. There was also a 91.2% hike in traffic expenses to S$13.0m on the back of more international call business but as this came mainly from the value segment, it led to a 7% YoY (-10.9% QoQ) fall in M1’s 4Q07 EBITDA to S$76.5m. For the full year, M1 posted a 3.9% YoY rise in revenue to S$803.3m and a 4.4% increase in net profit to S$171.8m. We were expecting earnings to come in at S$175.8m on revenue of S$774.0m. M1 also declared a final dividend of S$0.083, bringing the total dividend to S$0.108.
Post-paid still most important. Operationally, M1 saw another increase of 68,000 subscribers in 4Q07, but the bulk came from the pre-paid segment, which added 58,000 users. Still, post-paid customers remained key and accounted for 89% of its 4Q07 revenue. And with expectedly aggressive promotions, there was a sharp 20.1% jump in average acquisition cost to S$209/user and a 23.5% hike in retention cost to S$147/user. And with the likely implementation of full number portability by 1H08, we can expect the acquisition/retention cost to remain high, if not higher.
Steady state expected in 2008. M1 believes its operations should enter a “steady state” this year, where it should be able to maintain its EBITDA margin at 45-46% as well as a payout ratio of at least 80%. Management also expects to spend S$110-120m in capex, where around S$30m will be spent on building its own backhaul system to reduce leased circuit costs from 2009 onwards. Other initiatives expected this year include bidding for the NGN program, either as a Netco or Opco with its HK partner, as well as running its call centre out of Kuala Lumpur.
Keep BUY with S$2.33 fair value. Thanks to its fairly resilient business and high payout ratio, we continue to like M1 as a defensive stock, especially in the current volatile market. We maintain our S$2.33 fair value and BUY rating.