M1 – OCBC

Another decent set of results

Mildly upbeat 2Q08 results. MobileOne (M1) posted another decent quarter of results, with 2Q08 operating revenue up 2.8% YoY (+0.7% QoQ) at S$205.3m, while net profit rose 1.5% YoY (+8.3% QoQ) to S$41.1m. EBITDA also rose 2.0% YoY (+5.8% QoQ) to S$83.5m, although margin slipped slightly from 45.5% in 2Q07 to 43.6% in 2Q08, it was still slightly higher than the 42.2% seen in 1Q08. As expected, the YoY dip in EBITDA margin was due to the run-up to true Mobile Number Portability (MNP). On an interim basis, operating revenue rose 3.3% YoY to S$409.2m, meeting nearly 51.0% of our FY08 estimate. Although 1H08 net profit slipped 12.5% YoY to S$79.1m, meeting 46.6% of our FY08 forecast, we note that the fall was mainly due to a tax credit in 1Q07; excluding the S$13.0m tax effect, the net profit growth was 2.3%.

MNP raises acquisition/retention costs. On the operating front, M1 added some 57k of new subscribers, with some 14k of new post-paid subscribers – double the pace seen in 1Q08, while new pre-paid users increased by 43k. Post-paid Average Revenue per User (ARPU) also recovered from S$61.6 in 1Q08 to S$61.9; pre-paid ARPU eased slightly from S$16.8 to S$16.5. M1 also saw its overall market share eased from 27.4% in 1Q08 to 26.0%, mainly due to the fall in pre-paid market share from 24.7% to 23.9%, as it is less keen on fighting for market share in this highlycompetition segment. As mentioned earlier, in the run-up to the introduction of MNP in mid-June, M1 saw a sharp jump in its acquisition cost, which rose 52.4% QoQ in 2Q08 to S$218/subscriber, while retention cost jumped 22.8% QoQ to S$167/subscriber; both were the highest levels over the last two years. However, management believes it is seeing signs that the competition is easing and believes costs would start to normalise in 2H08.

Stable operations guidance in 2H08. Going forward, management is maintaining its guidance of stable operations for the year. M1 has also declared an interim dividend of S$0.062/share, and will maintain a total cash distribution equivalent to at least 80% of its earnings. Nevertheless, due to the higher operating expenses, we will pare our earnings estimates for FY08 by 4.9% and FY09 by 4.0%. But our DCF-based fair value remains unchanged at S$2.33. We continue to like M1 as a defensive stock, given its stable earnings stream and good dividend payout, hence we retain our BUY rating.

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