M1 – Phillip

FY2008 results

Net profit declined in FY2008. For FY2008, M1 reported operating revenue of S$800.6m (-0.3% yoy), profit before tax of S$185.0m (-4.9% yoy) and net profit of S$150.1m (-12.6% yoy).

There are three main revenue segments: mobile telecommunication services, international call services and handset sales. Mobile telecommunication services registered 0.2% increase in revenue to S$601.4m as the customer base increased by 10,000 and 96,000 from last quarter and last year respectively to 1,631,000. Postpaid revenue fell by 1.6% to S$529.8m while prepaid revenue increased 16.2% to S$71.6m. Moreover, international call services posted 7.9% rise to S$137.1m while handset sales fell by 18.4 percent to S$62.1m.

The introduction of full mobile number portability from 13 June 2008 resulted in increases in both its acquisition and retention costs. This caused the operating expenses to rise by 1.1% to S$608.9m. However, other revenue and finance costs dropped by 65.5% and 20% to S$1.0m and S$7.6m respectively. As a result, profit before tax fell to S$185.0m. Net profit decreased by 12.6% to S$150.1m in FY2008 mainly due to the absence of tax adjustments, which occurred in FY2007.

Profit margin. Net profit margin increased from 17.5% in 3Q FY2008 to 18.8% in 4Q FY2008 mainly due to lower staff costs. Based on a year-on-year comparison, it fell from 21.4% in FY2007 to 18.7% in FY2008 because of higher retention and acquisition costs.

The actual revenue and profit were 4.4% and 9.6 percent below our forecasts respectively. This could be attributed to the introduction of mobile number portability that resulted in higher costs.

Outlook for FY2009. M1 expects 2009 to be a challenging year due to the global financial crisis. It has submitted a bid as the Operating Company to build and operate the active infrastructure of the Next Generation National Broadband Network. The announcement of the winning bid is expected to be in 1Q 2009. Despite the crisis and barring unforeseen circumstances, it expects operations to remain stable. Moreover, its dividend policy for 2009 is to pay 80% of net profit after tax as dividend.

Chief Executive Officer (CEO) stepped down. In January 2009, M1 announced that its CEO, Neil Montefiore, would step down from 1 February 2009. The present Chief Financial Officer (CFO), Karen Kooi Lee Wah, would be the Acting CEO in additional to her duties as CFO while M1 searched for a new CEO. We believe that it would take three to four months before a new CEO could be appointed.

Maintain Hold with fair value cut from S$2.16 to S$1.67. Due to the worse-thanexpected results and the challenging outlook, we have reduced our earnings estimates for 2009 and 2010. Therefore, based on our valuation using the free cash flow to firm model, the target price is cut from S$2.16 to S$1.67. M1 remains a hold due to its limited focus on the domestic market. The dividend yield of M1 is 8.2%.

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