M1 – DBS

Low beta stock for value buyers

Story: M1 being a pure mobile player, unlike its competitors, is not affected by (a) rising costs in the pay TV business as SingTel and StarHub fight over content rights (b) dwindling ARPU in the broadband business due to lower pricing plans and looming threat from National Broadband Network (NBN).

Point: We highlight three key points.

Mobile competition past its peak in 2Q08. After the introduction of mobile number portability (MNP) in Aug 08, competition in the post-paid mobile business has eased. An evidence is in SingTel’s introduction of iPhone at a significantly higher handset price of S$698 on the cheapest monthly plan. While competition in the pre-paid mobile segment remains intense, note that M1 has chosen margins over market share.

1. Likely to meet FY08 street estimates. With 1H08 EBITDA up 2.5% y-o-y despite MNP introduction, we think M1 should comfortably meet street estimates of flat EBITDA for FY08. Going forward, FY09 and FY10 stand to benefit from cost savings from building its own backhaul network.

2. Limited downside in the worst case. M1’s historical PER range (9x-13x) in the last five years suggests trough price of S$1.62 pegged at 9x FY08 EPS. With about 14 cents annual dividends, this implies limited downside even in the worstcase scenario.

Relevance: The stock is trading below 10x FY08 PER compared to 15x FY08 PER for StarHub and 14x FY09 (Mar year end) for SingTel. Based on M1’s historical PER of (9x- 13x), our TP of S$2.20 is pegged at 12x average FY08-FY09 EPS. We see 22% share upside complemented by 8% dividend yield. Share price catalysts are (i) More news flow on NBN as M1 is the only beneficiary, (ii) Additional potential 10% yield from capital management assuming target of1.5x
net debt to EBITDA depends on the decision to participate in OpCo bidding. Upgrade to BUY. M1 remains our top pick in the sector.

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