M1 – Phillip

Slightly Below Expectations

Net profit dropped in Q4, but rose slightly for the full year FY07. For Q4 FY07, M1 reported operating revenue of S$206.9m (+2.9% yoy) and net profit of S$37.9m (-4.8% yoy). The increase in revenue was due to service revenue growth as the customer base increased from 1,337,000 on a yoy basis to 1,535,000.

The decrease in net profit was due to higher operating costs, which increased to S$160.7m (+7.8% yoy). The increase in operating expenses such as costs of sales, staff costs, depreciation and amortisation, facilities as well as general and administrative expenses more than offset the decrease in advertising and promotion expenses as well as provision for debts.

For the full year FY07, operating revenue of S$803.3m was 3.9% better yoy while the FY07 net profit of S$171.8m was 4.4% higher yoy. Nevertheless, the operating revenue and net profit are below our estimates of S$807.0m (4.6% below expectation) and S$180.0m (4.6% below expectation) respectively.

It has also recommended a final tax-exempt dividend of 8.3 cents per ordinary share. Together with the interim dividend of 2.5 cents per ordinary share, the full year payout is 80% of net profit after tax for 2007.

Outlook for FY08. M1 expects 2008 to be challenging as full mobile number portability will be introduced by the middle of the year. There are also new opportunities as M1, being part of a consortium, prepares to submit a bid to be the Network Company to design, build and operate the passive infrastructure layer fro the Next Generation National Broadband Network (NBN). Barring unforeseen circumstances, it expects operations to remain stable for 2008.

Maintain Hold with fair value reduced to S$2.16. Based on our valuation using the free cash flow to firm model, the target price is reduced from S$2.38 to S$2.16 due to lower-than-expected profit for FY07 and reduced estimates for revenues from FY08 onwards. M1 remains a hold as growth in revenues and profits are likely to be limited due to its focus on the domestic market.

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