M1 – DBS

Cost savings help earnings

M1’s 4Q08 results were better than we expected, mainly due to lower staff cost. It declared a final 7.2 cents, as expected, and management intends to maintain the 80% payout ratio for FY09F. Management also guided for similar earnings for FY09F, as it remains cautious of the impact of a possible recession on the population of foreign workers in Singapore.

Better bottomline but weaker topline. 4Q08 net profit of S$36.6m (+6% q-o-q, -3% y-o-y) exceeded our S$32.6m forecast, due to S$6m savings in staff cost resulting from lower bonuses. But revenue of S$195m (- 1% q-o-q, -6% y-o-y) was short of our S$202m forecast due to lower handset sales and slightly lower ARPU, which could be attributed to the economic slowdown.

Competition seems to move in the right direction. Average retention and acquisition costs tumbled from 3Q08 levels. Churn rate also fell q-o-q to 1.7% from 1.8%, indicating competition is getting more rational. We expect competition to ease in 2009 as operators get into cost control mode, but FY09F earnings might soften as easing competition may not be sufficient to offset the impact of recession.

Fair value at S$1.57. This is pegged to 10x FY09F PER, based on its historical PE range of 8x-13x. Given its 12% free cash flow yield, dividends should be sustainable at 8.5% yield. FY10F earnings is expected to grow y-o-y due to c.S$20m cost savings from its backhaul network. With 0.7x net debt to EBITDA ratio, the lowest among Singapore telcos, M1 will have ample room for capital management when credit conditions improve. Maintain BUY.

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