M1 – DBS

Competition takes its toll

Story: Net profit fell 21% y-o-y to S$34.4m, significantly lower than our estimate of S$40m. Service revenue fell for the first time (-1.8% y-o-y, -5.2% q-o-q) this year, as M1 struggled to keep churn rate under control. Management has lowered its guidance from “stable operations” to “single digit decline in core earnings” for FY08.

Point: We want to highlight two key points.

1. Post-paid mobile competition stronger than expected.
Handset subsidies are coming down, evident in lower handset sales. But free 3-6 months subscription plans offered by competitors have led to higher churn rate and weaker ARPU. M1’s monthly churn rate reached 1.8% from 1.5% in the previous quarter. SingTel and StarHub seem to be benefiting from high churn at M1.

2. Pre-paid mobile subscriber growth slowing sharply.
Although M1 managed to increase its pre-paid market share slightly, the sector pre-paid subscriber base has contracted 2.3% q-o-q. The slowing Singapore economy could have resulted in a net outflow of workers and tourists, who are typical pre-paid subscribers. We would like to highlight that with aggressive pricing of international direct dialing (IDD) service, traffic has increased significantly but IDD revenue has fallen by 15% q-o-q.

Relevance: We lowered FY08F and FY09F earnings by 8.6% and 12%, respectively, after imputing lower revenue assumptions. Based on M1’s historical trading range (8x-13x), we applied 10x average FY08-FY09F EPS (instead of 12x) to derive a revised target price of S$1.65. The stock has performed well compared to the broader market, and could see a de-rating after this set of dismal results. We downgrade M1 to FULLY VALUED.

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