M1 – DMG

No big surprises

Operational earnings down, in line with expectations. In the first quarter to Mar 09, revenue declined 8.6% to S$186.4m while earnings rose 10.3% to S$41.9m. The improved net margins were largely a result of tax adjustments for reduction in corporate tax rate. Taking out the tax impact, the results would be within our expectations.

Balance sheet improves further. Due to strong cash flows, M1’s key leverage ratios have improved. Net gearing now stands at 0.68x, against 0.85x a year ago. EBITDA/Interest, at 45.2x, is the highest among the telcos, and an improvement over the 37.6x it recorded in the previous corresponding period. Some concerns. M1’s post-paid market share fell from 27.2% in 4Q08 to 26.8% in 1Q09. While the level of competition tapered off in 4Q08, it intensified again in the past few months. From the tone of the management, we gather that should its market share continue to fall, it will retaliate aggressively. M1 has already introduced innovative programmes like Take3 to win over new customers. One other concern investors may have is the vacuum at the top after the departure of Neil Montefiore in Jan 09. Acting CEO and CFO Karen Kooi indicated that the new CEO will be unveiled “very soon”.

NBN plans. M1 believes it will benefit from the NBN when it becomes operational in 2Q10. In our view, it may not be as rosy. We expect SingTel and StarHub to launch aggressive campaigns to lock in customers later this year, pushing market penetration past the 90% mark by then. Morever, the low wholesale prices will attract new players, which will place pressure on broadband prices.

Maintain estimates and call. We are maintaining our earnings estimates for M1, with a 5.6% contraction to S$141.6m in FY09 and a growth of 4.6% to S$148.1m in FY10. Based on DDM, we attain a target price of S$1.52. Given the limited upside, we maintain NEUTRAL on M1.

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