M1 – Phillip

1Q FY2009 results

1Q FY2009 results. For 1Q FY2009, M1 reported operating revenue of S$186.4m (-8.6% yoy), profit before tax of S$44.1m (-5.8% yoy) and net profit of S$41.9m (+10.3% yoy).

There are four main revenue segments: telecommunication services, international call services, fixed network services and handset sales. Telecommunication services registered 8.4% ecrease in revenue to S$140.3m. Postpaid revenue fell by 9.9% to S$122.6m while prepaid revenue ncreased by 3.5% to S$17.7m. Moreover, international call services posted 5.0% drop to S$32.0m while handset sales fell by 18.7% to S$13.9m. Fixed network services was a new segment that contributed revenue of S$0.3m.

Operating expenses also decreased to S$141.3m (-9.0% yoy) due to lower handset costs and staff costs. M1 benefitted from the Jobs Credit Scheme, paid lower bonus and hired fewer staff.

Despite the drop in revenue, net profit increased mainly due to the 75.0% decrease in provision for taxation from S$8.8m in 1Q FY2008 to S$2.2m in 1Q FY2009. This was a result of the reduction in corporate tax rate from 18% to 17%.

Profit margin. Net profit margin increased from 18.8% in 4Q FY2008 to 22.5% in 1Q FY2009 due to the tax adjustment. Based on a year-on-year comparison, it rose from 18.6% in 1Q FY2008 for the same reason.

Decrease in market share. M1 saw a decrease in the number of prepaid and postpaid customers from 748,000 and 882,000 in 4Q FY2008 to 740,000 and 879,000 in 1Q FY2009 respectively. Its market share for the prepaid and postpaid segments has also decreased from 24.4% and 27.2% in 4Q FY2008 to 23.9% and 26.8% in 1Q FY2009 respectively. As M1 does not have Pay TV, it is unable to offer bundled services to customers. This is a concern as it is likely to lose market share to SingTel and StarHub.

Outlook for FY2009. M1 expects 2009 to be a challenging year due to the global financial crisis. Despite the economic downturn, it expects operations to remain stable. Moreover, its dividend policy for 2009 is to pay 80% of net profit after tax as dividend.

Maintain Hold with fair value at S$1.67. Based on our valuation using the free cash flow to firm model, the target price is at S$1.67. M1 remains a hold due to its limited focus on the domestic market and the lack of Pay TV services. The dividend yield of M1 is 8.8%.

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