M1 – DBS

Tough time ahead

Comment on Results

Net- profit of S$38.0m was up 2.7% y-o-y if we exclude one-off tax credit of S$12.9m from last year profits. Revenue at S$204m was up 3.8% mainly due to growth in revenue from (i) mobile segment with increased contribution from M1 data plan; and (ii) international call services. EBITDA margin at 42.2% was slightly lower than 43.4% last year but in line with our expectations.

Further loss of market share across mobile while ARPU held up pretty well. Although M1 added 7K and 12K subscribers across post-paid and pre-paid segments respectively, market share was lower at 28.1% (28.4% in 4Q07) and 24.7 (Vs 26.1%) respectively. On the other hand, post-paid ARPU was fairly stable at $$61.6 (S$62.4 in 4Q07), while pre-paid ARPU was down at S$16.8 (S$18.2) due to stiff price competition.

Recommendation

Management re-iterated guidance for stable operations. Management is guiding for EBITDA margins around 44-45% for the whole year, similar to the margins of the last year, in the hope that cost savings from outsourcing of call centre operations, compensate for higher costs due to mobile number portability (MNP) in June 08. The company also revealed that 75% of its postpaid subscribers are contracted for one year plus. Capex guidance for the year is still intact at about S$100m as M1 invests into its own leased circuits in 2Q08.

We maintain HOLD with DCF based target price of S$2.20. Regular dividend yield of over 7% can be further complemented by special dividends or capital reduction as M1’s net debt-to-EBITDA at 0.6x remains far below its target of 1.5x. However, in our view, Mobile Number Portability (MNP) could be a significant risk for the company.

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