M1 – DBS

Good results for a weak quarter

Excluding exceptionals, 1Q09 net profit of S$36m (-4% y-o-y, flat q-o-q) exceeded our expectation despite significant lower revenue, due to effective cost control. Including dividends, M1 outperformed the STI by 2% YTD, but its solid 9% yield is the key attraction. M1 remains a BUY although we nudged up our estimates, and target price to S$1.60. There is potential upside to our FY10F earnings because of S$15-20m backhaul cost savings.

Earnings better than expected despite revenue contraction. Excluding S$6.6m exceptional income (S$5.5m in tax credit and S$1.1m from interest rate swap), net profit of S$36.4m (-4% y-o-y, flat q-o-q) exceeded our expectation of S$34m. This was despite a larger than expected 8.6% y-o-y drop in revenue; the company registered higher EBITDA margin because of (i) lower staff costs due to job credit scheme and lower facilities expenses due to lower rentals, (ii) lower handset costs as M1 started to amortize handset subsidies over a longer contract period instead of fully expensing it in the quarter under its new promotion “Take3”.

Market share loss coupled with decline in churn rate. M1 lost more market share than expected which management attributed to a spike in competitive intensity and weak economy. Meanwhile, postpaid ARPU also fell more than expected, due to promotions on bundled mobile plans by M1. Management hopes to arrest market share loss with its new promotion “Take3” that was launched in late Feb09. On a positive note, churn rate declined for the third consecutive quarter to 1.6%.

Management reiterates stable FY09F earnings. But they hesitated to guide for stable top line. Lower staff and facilities costs should continue to benefit the company. We maintain a BUY rating for M1, with a revised target price of S$1.60 based on 10x FY09F PER. There is a potential upside to our FY10F earnings arising from S$15-20m backhaul cost savings.

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