M1 – DBS

Another tough quarter ahead

Comments

Net- profit of S$41.1m was up 1.2% y-o-y mainly due to one time write back of S$6m provisions for leased circuit costs otherwise earnings would have declined y-o-y. Revenue at S$205.3m was up 3.8% mainly due to strong 22% growth in revenue from international call services. EBITDA margin at 43.6% were lower than 45.5% last year but inline with our expectations. The company declared 6.2 cents in dividends as expected.

Slight loss of market share while ARPU held up pretty well. Although M1 added 43K and 14K subscribers across pre-paid and post-paid segments respectively, market share was lower at 23.9% (24.7% in 1Q08) and 28.0% (Vs 28.1%) respectively. Post-paid ARPU was fairly stable while pre-paid ARPU was down at S$16.5 (S$17.5 in 1Q08) due to stiff price competition.

Recommendation

We think MNP pain would be felt for one more quarter. M1 would have reported declining earnings for 2Q08 Y-o-Y if not for S$6m write back. While MNP kick started on 13 June 08, M1’s monthly churn rate has gone up to 1.5% from 1.3% in 1Q08. Subscriber acquisition and retention costs have also gone up subsequently. We expect the full impact of MNP to be visible in 3Q08 numbers. We maintain HOLD with DCF based target price of S$2.20. Regular dividend yield of over 7.3% 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

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