M1 – OCBC

Stable Operations in 2009

4Q08 results mostly in line. MobileOne (M1) reported its 4Q08 results on Friday, with revenue down 5.9% YoY (down 1.0% QoQ) at S$194.7m, just slightly ahead of our S$190.6m forecast. While net profit fell 3.7% YoY to S$36.6m, it was up 6.1% QoQ and was also ahead of our S$33.6m forecast. One reason for the slightly better-than-expected sequential earnings was the improvement in EBITDA margin on service revenue from 41.6% in 3Q08 to 44.0%, as it had been less aggressive during the holiday period (EBITDA margin was 40.9% in 4Q07). According to management, this was because it had shifted its promotions to the 2nd and 3rd quarter following the launch of true mobile number portability in June 08.

For the full year, revenue was flat at S$800.6m, while net profit fell 12.6% to S$150.1m, both pretty close to our S$796.5m and S$147.1m estimates. However, the street may be slightly disappointed as consensus was looking at a net profit of S$153.1m on S$815.8m revenue. M1 declared a final dividend of S$0.072/share, bringing the total dividend to S$0.134 (versus S$0.108 for FY07), or 80% of its net profit as promised.

Stable operations expected. Although M1 is mindful of the current economic climate and the credit crunch, it believes that its operations should remain stable; service EBITDA margin will remain around 43-44%. It intends to spend around S$100-120m as capex this year. It also aims to maintain its payout ratio of 80%. However, we are a little less sanguine as we expect M1’s churn to remain high, hampered by its lack of bundling abilities. At such, we are sticking to our original forecast of 2.7% drop in revenue and a 4.1% drop in earnings; retention and acquisition costs may remain high as we believe M1 may need to work a little harder to retain customers versus its peers.

Maintain BUY with S$2.12 fair value. Meanwhile, the ongoing search for a new CEO may be another concern but we believe that there should be no change to its near- to medium-term strategy of M1 becoming a multiple-play operator via the NGNBN (Next-Gen National Broadband Network). And against the deepening economic backdrop, we still like M1 for its defensive and strong free cash flow-generating business. As such, we maintain BUY and S$2.12 fair value.

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