M1 – CIMB

Sailing again

1Q09 results preview

Flat core net profit expected. M1 is slated to release its 1Q09 results on 16 Apr 09. We expect a core net profit of S$35m-37m (from S$36.6m in 4Q08) on the back of a 3-4% qoq decline in revenue and 1-2%-pt increase in EBITDA margins. 1Q is a seasonally low quarter, whereas 4Q is the strongest typically, exacerbated by holidays like Chinese New Year and shorter months which would curtail usage. In addition, roaming revenue which makes up about 15% of the total would have been affected by slowing business activity and travel. On the other hand, EBITDA margins should improve from easing subscriber acquisition and retention costs (SARC). On top of that, we do not expect any dividends for 1Q, as has been the practice in the past few years.

Another potential area of weakness in the longer term is revenue from migrant workers, which comprises an estimated 13% of M1’s revenue. This segment may soften if workers are repatriated but we have not seen mass departures as the construction industry remains buoyant.

Main beneficiary of NGNBN. Although M1 lost the OpCo bid to StarHub, we believe it succeeded in forcing the winning bidder to offer low prices, similar to the NetCo experience. The outcome is positive for M1, we believe, as it stands to save almost S$15/month/subscriber as OpCo lowers wholesale pricing from S$35.71 that StarHub charges currently to S$21 and the low prices will help it undercut existing broadband prices. On top of that, NGNBN would allow M1 to compete more equitably and address its current single-product disadvantage.

Any capital-management initiatives? Having lost the bid for OpCo, M1 is relieved of the need for additional capex. Based on our recent discussions with the telco, it seems it is unlikely to declare any special dividends or capital reductions this year. In the current climate, it would be more prudent to reserve cash although its gearing is low. M1’s net debt/EBITDA is 0.7x, substantially below its rivals’ 1.2-1.3x. Historically, except for 2Q07, M1 had undertaken capital-management initiatives when its net debt/annualised EBITDA was below 0.3x.

Valuation and recommendation

Maintain OUTPERFORM, earnings forecasts and DCF-based target price of S$2.13 (WACC: 8.3%, LT growth: 1.0%). The recent OpCo result reinforces our positive view on M1, which is expected to be the largest beneficiary of NGNBN. Rerating catalysts could include improving core net profits, strong dividends and the favourable outcome from NGNBN. We recently upgraded SingTel to our top pick for Singapore, supplanting M1. This is because of receding risks at SingTel and its higher beta, which should benefit the stock in the current bullish market.

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