M1 – CIMB

Rising to the top

Upgrade to OUTPERFORM from Neutral. We are upgrading M1 to OUTPERFORM from Neutral as we believe the worst from mobile number portability is over. The stock offers fairly strong dividends and an upgrade in its backhaul could conservatively save it S$20m p.a. starting end-FY09. M1 is the top pick in our sector for the above reasons and the fact that surplus cash could be released.

Could return excess cash. The possibility of this is contingent on whether it bids for OpCo but assuming it loses/does not bid, we estimate that M1 could return up to an additional 17.8cts/share for a 9.3% yield by end-2009, if it pursues a net debt/EBITDA of 1.0x, the lower end of its 1.0-1.5x target. This is in addition to a recurring dividend yield of 8%.

Earnings adjustments. We downgrade our FY08 earnings estimate by 2.7% after reducing revenue expectations for its mobile and handset divisions, partially offset by higher IDD expectations. For FY09-10, we raise our estimates by 0.9-14.1% on account of lower capex and depreciation as well as a conservative S$20m p.a. M1 could save on its network.

Raising target price. Our target price rises to S$2.31 from S$2.15 following our earnings adjustments, still based on DCF valuation (unchanged WACC of 7.9%). Rerating catalysts could include capital-management initiatives and stronger-thanexpected earnings.

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