M1 – DBS

Don’t expect much from NBN

• A saturated broadband market and the lack of a pay TV platform means that M1 has little chance of benefiting from the National Broadband Network
• M1 is trading at similar valuations to StarHub now, compared to 20-30% discount to StarHub before. M1’s FY09F yield is 8.2% versus StarHub’s 9.4%.
• M1 has reached our target price, downgrade to HOLD.

M1’s entry into broadband may be too late. By mid 2010, household broadband penetration would have crossed 110% (near 100% already) in Singapore. M1 does not have content expertise, unlike its competitors who have gained valuable experience from their pay TV business. In our view, content expertise is a must, as (i) attractive content will lure subscribers, and (ii) content ARPU will compensate for declining bandwidth ARPU, to a large extent. The IPTV business may not be an option for M1; there has not been a profitable IPTV business model in Singapore. Other players have compelling pay TV platforms already (though not very profitable), and M1 may not be able to compete with their bundled offerings. As a broadband retailer, through NBN, M1 could gain subscribers by offering the lowest price, which may further dent its profitability.

Valuations not compelling anymore. M1 is trading at 10.2x FY09F PER vs StarHub’s 10.4x, compared to 20-30% discount to StarHub before. And M1’s FY09F projected yield of 8.2% is lower than StarHub’s 9.4%.

Downgrade to HOLD. At our target price of S$1.60, including 8.2% dividend yield, there is limited upside for M1. Hence, we downgrade M1 to HOLD. Management has ruled out capital management in FY09, which removes a key rerating catalyst.

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