M1 – CIMB

Good cost-control amid revenue pressure

• Within expectations. 1Q09 core profit was spot on, making up 24.9% and 25.3% of our full-year forecast and consensus respectively. Reported profit includes a S$5.5m tax adjustment for a lower corporate tax rate from 18% to 17%. 1Q was characterised by topline fatigue, steady margins and continued market-share loss. No dividend was declared, as expected.

• Weak revenue. Top line slipped 9% yoy and 4% qoq due to competition, lower roaming and reduced handset sales. Postpaid revenue dropped 9.9% yoy and 4.4% qoq from fewer subscribers due to competitors’ bundling and exclusive handset offerings and M1’s own per-second billing and multi-line savers which eroded its ARPUs. Roaming accounted for 15% of mobile revenue, and usage has been coming off due to a slowing economy.

• Cost-controls masked by Take3. EBITDA margins ticked up 0.6% pt qoq and 2.3% pts yoy from more active cost-control, particularly of handset (-24.3% yoy) and staff costs (-20.8% yoy). However, lower handset costs were masked by its Take3 programme which amortises handsets over the life of contracts vs. expensing under other schemes.

• NGNBN pursuit. M1 is intent on its transformation into a full-service operator. This should gain momentum once NGNBN is operational. Strategies have not been revealed but M1 has been gaining experience from reselling StarHub’s broadband access. Consistent with our view, M1 sees downward pressure on retail broadband tariffs from low wholesale pricing.

• Guidance reiterated. M1 held on to its FY09 guidance of stable operations, implying stable PATs despite a challenging economic outlook. This also implies a stable DPS for FY09, in our view.

• Reiterate OUTPERFORM, earnings forecasts and target price. While we retain our OUTPERFORM rating, we flag growing concerns over its market-share loss, postpaid weakness and the scope for further cost-controls. For now, we retain our earnings forecasts and DCF-based (WACC: 8.3%) target price of S$2.13. Re-rating catalysts could include a reversal of market-share loss, qoq improvements in earnings, strong dividends and a favourable outcome from NGNBN.