M1 – OCBC

Defensive but expect lower earnings

Defensive but earnings likely lower. MobileOne (M1) is likely to see its business remain fairly defensive in an economic downturn. However, we believe earnings are likely to be lower, especially if the recent ARPU and margin trends continue. As a recap, M1 posted a slightly disappointing set of 3Q08 results, with operating revenue down 1.7% YoY and also 4.2% QoQ to S$196.7m, while net profit tumbled 20.9% YoY and 16.1% QoQ to S$34.5m. 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. M1 has also guided for a single-digit decline in net profit in 2008, versus one of a stable operation earlier.

Most vulnerable to higher churn. From its 3Q08 results, we see that M1 has the highest monthly churn of 1.8% among its peers (1% for StarHub and 0.8% for SingTel), mainly due to its lack of bundling abilities; StarHub has been able to offer relatively attractive cost savings for customers who subscribe to all three of its services – mobile, broadband Internet and cable TV; SingTel also has its Mio plan that offers a bundling of similar services at slightly lower price points. And as the recession deepens, the search for value may see some of its customers switching over to StarHub and SingTel, especially since subscribers can retain their existing numbers with the launch of true MNP (Mobile Number Portability) in June.

Retention cost to remain high. As such, M1 may have to work harder than the other two telcos in retaining customers, but we do not believe that this would entail an all-out price war. Instead, M1 is likely to offer more freebies and premiums to retain customers, thus keeping its retention cost high. But continuous internal cost control measures should help balance out the squeeze on its EBITDA margin. We are also expecting M1 to adopt a more prudent capex approach, ensuring that it has ample free cashflows to support its attractive dividend payout ratio of at least 80% of recurring income. Meanwhile, we are also upbeat about its prospects of getting a slice of the fixed line broadband market when the Next-Generation National Broadband Network fully takes off in 2012. Maintain BUY with S$2.12 fair value.

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