M1 – CIMB

Highlights from roadshow

Roadshow in Singapore

We hosted a non-deal roadshow for M1 on 17 Apr following the release of its 1Q09 results on 16 Apr. M1 was represented by Ms Karen Kooi (CEO), Mr P Subramaniam (Chief Marketing Officer), Mr Lee Kok Chew (Director of Business Development) and Mr Ivan Lim (GM of Business Development and Investor Relations). We scheduled group and one-on-one meetings with eight investors. Key discussion points were its poor 1Q09 revenue, the outlook for 2009, NGNBN and capital-management initiatives.

Mobile experience is not representative of 2009

Poor 1Q does not signify a trend. M1 was at pains to highlight that 1Q09 revenue softness was not representative of the trend for 2009. To recap, revenue fell 9% yoy and 4% qoq on a combination of a slowing economy (lower roaming and IDD) and a loss of postpaid subscribers (to bundles and exclusive handset deals). It will be making a concerted effort to boost the topline through stimulating higher sign-ups of higher-bill plans (Take 3 is a good example), increasing take-up and boosting its prepaid business.

Defending market share. While M1’s focus has always been on profitability and not market share, it did concede that it would be prepared to defend its subscriber base more vigorously as it does not wish to see further erosion with the subscriber base approaching its internal threshold. Note that M1’s total market share has hit an estimated 25.4% or a loss of 1.1% pts yoy, the lowest in four years.

Boost to topline but margins would potentially be driven down. M1 signalled that it would be more aggressive on subscriber acquisitions and retention (SARC) in an effort to stem the erosion in its market share. It will be targeting more market segments (youth, young professionals, higher-end/corporate customers) while offering more services in 2Q-3Q. However, boosting revenue would come at the expense of margins as more aggressive handset subsidies are thrown in. It noted that SARC costs are at uncomfortably low levels currently and would trend upwards in subsequent quarters. It would be managing cost lines closely to stabilise the bottom line although we see very little room for costs to be cut further.

Take 3 take-up quite strong. Take-up for this programme has been quite strong with 20% of its sign-ups opting for the programme. The key attraction is giving customers the option of exchanging their handsets after nine months of sign-up or to those who have completed at least 20 months of their 24-month handset contracts. Take 3 aims to attract mid-to-higher-end customers who wish to upgrade their phones before their contract periods expire. It is also hoped that this programme would lift M1’s postpaid ARPU (-8% yoy, -4% qoq in 1Q09), which has been sliding. Customers who opt to keep their handsets would have to pay a fee.

Well-placed for NGNBN

Well-placed and prime beneficiary. M1 is well-placed to be a retail service provider (RSP) as it does not have an existing fixed broadband business to cannibalise and is excited at this prospect. Incremental costs for setting up as an RSP are minimal except for international bandwidth although that is not a major cost item. M1 can leverage its relationships with sister companies while it already purchases international bandwidth for its wireless broadband business. Unlike other RSPs, it also has its own billing and customer service systems in place. In fact, the main cost for M1 would be regulated wholesale pricing, which is very low and attractive.

Wholesale pricing to fall. M1 believes that broadband pricing will cascade downwards given the relatively low wholesale pricing. The bulge bracket will progressively move from lower to higher speeds and subscription fees should fall i.e. pricing per megabyte will fall.

Setting up OpCo. Once M1 reaches a critical mass of subscribers (20% of market share), M1 may set up its own OpCo to enjoy greater flexibility in managing bandwidth and resources. It likens the experience to its current backhaul build-out where data traffic has surged and building its own backhaul would help it save on leased circuit costs. It is confident of capturing a 20-25% market share in the fixed broadband space over the medium term although no timeframe has been provided. Note, however, that this is more of a secondary and longer-term objective.

Competing OpCo? Although not an official view, M1 believes that SingTel could set up its own OpCo as it has a critical mass of subscribers to tap on. Our conversations with industry executives suggest that SingTel would likely roll out its own OpCo where it could use some existing equipment.

Thoughts on NetCo and OpCo. For NetCo, M1 considers SingTel’s win as a win-win proposition for all. On its part, M1 will gain open access while SingTel will be able to monetise and protect what would have been a stranded asset had Infinity won. That said, returns on NetCo for SingTel are not very exciting and M1 pointed to the worldwide infrastructure projects as a gauge, which typically fetch returns of below 10%.

For OpCo, it views the margins there as extremely thin as they are sensitive to the subscriber base. OpCo is more of a strategic win for StarHub. Either way, M1 is satisfied with the outcome. Had it won, M1 would have secured returns at wholesale levels with an exclusivity period as it commands less than 25% of the market.

Other comments

No capital-management initiatives in the near term. Despite a low gearing of 0.6x net debt/EBITDA in 1Q09 (below its 1.0-1.5x target and rivals’ 1.2-1.3x), M1 will not be returning additional cash this year. It believes that it would be more prudent to keep cash on the balance sheet given the current economic climate and tight credit conditions. It will only consider further capital-management initiatives once the economy stabilises or shows no signs of further downward pressure.

Valuation and recommendation

Maintain OUTPERFORM, earnings forecasts and target price. M1 is a prime beneficiary of NGNBN, we believe, as NGNBN can help to produce a new revenue stream for the telco. For exposure to yields in the Singapore telco sector, we would advocate M1 over StarHub. StarHub faces the prospect of an intense bidding war with SingTel over football content rights and compression in its broadband business. If SingTel launches its own OpCo, this would further challenge StarHub’s OpCo. For those looking for growth, we prefer SingTel.

Our OUTPERFORM rating and DCF-based (WACC: 8.3%) target price of S$2.13 for M1 have been maintained on possible re-rating catalysts from: 1) a reversal of marketshare loss; 2) qoq improvements in earnings; 3) strong dividends; and 4) the favourable outcome from OpCo.

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