M1 – OCBC
Eyes lower FY08 earnings after poor 3Q08
Disappointing 3Q08 results. MobileOne (M1) reported a slightly disappointing set of 3Q08 results on Friday, with operating revenue down 1.7% YoY and also 4.2% QoQ to S$196.7m, which was much steeper than the 1.5% QoQ decline that we had expected, hit by lower service revenue. On the other hand, net profit tumbled 20.9% YoY and 16.1% QoQ to S$34.5m, below our S$40.6m estimate. The telco blamed it on higher acquisition and retention costs, although in absolute numbers, acquisition cost eased from S$218 to S$162, while retention cost fell from S$167 to S$155. For 9M08, operating revenue came up to S$605.9m, up 1.6% YoY, meeting 75.6% of our FY08 forecast, while net profit fell 15.2% to S$113.6m, or 70.0% of our FY08 estimate.
Lowest net add since 2Q06. M1 also posted the lowest net add of just 10k subscribers in 3Q08 – the lowest since 2Q06. Management explained that it was still feeling the impact of full MNP (mobile number portability), despite saying during its 2Q08 announcement that it had minimal impact and competition was easing. As a result, its monthly churn rate rose further to 1.8% – again the highest since 2Q06. M1’s inability to offer “bundling” of services was another reason for the higher churn. Also worrying, the easing of its post-paid ARPU (average revenue per user) from S$61.9 in 2Q08 to S$59.2 in 3Q08 – management cited its MNP promotion which offered free six-month mobile subscription upfront as compared to those offered by its competitors which gave them towards the end of the two-year contract period.
Defensive but earnings likely lower. Although we continue to believe that M1’s business is fairly defensive in an economic downturn, we believe M1’s earnings are likely to be lower, especially if the recent ARPU and margin trends continue. M1 has also guided for a single-digit decline in net profit in 2008, versus one of a stable operation earlier. For our estimates, we have eased FY08 operating revenue by 0.7% and earnings by 9.3%; FY09 operating revenue by 3.6% and earnings by 13.3%. This in turn pares our fair value from S$2.33 to S$2.12. With M1 still committed to paying out at least 80% of its underlying net profit this year and likely next year as well, we maintain our BUY rating.