M1 – OCBC

Likely stable 3Q08 showing

Infinity consortium loses NetCo bid. Recently, MobileOne (M1) and its partners (StarHub, Qatar Investment Authority) from the Infinity consortium lost out on the NetCo (Network Company) tender to OpenNet (Axia, SingTel, SPH, SP Telecoms) consortium. Given that OpenNet can leverage on SingTel’s existing extensive ducting network and deliver the NGNBN at least 2.5 years ahead of the iN2015 vision schedule, the smart money was always on OpenNet winning the two-horse race, even before the surprise pullout of City Telecoms from the Infinity consortium in late August. Nevertheless, the decision will pave the way for M1 to concentrate on the Operating Company (OpCo) tender, whose deadline has been again delayed to 14 November. And we believe that M1 stands to benefit the most from this as it can broaden its service offering into the broadband space. We note that M1 has already started to make some headway in this area with its mobile and cable broadband services.

Slowing economy but earnings relatively resilient. But the greatest challenge facing the company is an economic slowdown, which the government expects to last for several quarters. While M1 is still expecting stable operations for this year, we believe that the pace of new additions in both the pre-paid and post-paid segments could slow in 2009. In addition, we can also expect some deterioration in ARPUs (Average Revenue per User) in both segments. However, we are not expecting a serious drop given that mobile communication has become well entrenched as a part of our daily lives. Hence earnings would remain relatively resilient even in an economic downturn. Furthermore, margins are likely to remain intact as we expect retention and acquisition costs to normalise as the MNP (true mobile number portability) has largely been a non-event for most subscribers.

3Q08 results likely stable. M1 will be announcing its 3Q08 results on 17 Oct after market closes. We are expecting revenue to be down 1.5% QoQ at S$202.2m, as subscribers wait for the usual year-end promotions, especially for the Apple iPhone 3G, before committing to a new contract. Net profit is likely to ease by a smaller 1.2% to S$40.6m as margins recover slightly. No dividend is likely to be declared in 3Q, but we continue to expect a final dividend of S$0.074 in 4Q, bringing the total payout to S$0.136/share (yield: 7%). We maintain our BUY rating and S$2.33 fair value.

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