M1 – AmFraser

Earnings and fair value revised up

• Results were marginally better than expected, despite the headline fall in topline and bottomline numbers for 2Q09 on a YoY basis. 1Q09 marked a low point, with encouraging signs of improving quarters. We are revising EPS up by 3% for FY09 and FY10. Our fair value is also revised upwards by 12% to S$2.03/share.

• Total revenue fell 7% YoY to S$191mil in 2Q09, but this was a 2% pick up from its low point in 1Q09. Its mobile subscriber base turned around from a contraction in 1Q09 to register net adds of 9,000/month in 2Q09.

• However, this came at the expense of higher subscriber acquisition cost (SAC) and retention cost. SAC picked up from S$134/subscriber in 1Q to S$151/subscriber, while retention cost rose from S$116/subscriber to S$150/subscriber. Total subscribers grew 4% YoY to 1.7 million with prepaid mix improving to 46.9%.

• Postpaid ARPU picked up from its low point in 1Q09 to S$60.70/subscriber in 2Q09, while prepaid continued its decline to S$15.50/subscriber. With the launch of several higher value data plans, the fall in data plan ARPU was stemmed in 2Q09, showing a slight improvement at S$22.80/subscriber.

• Contribution from non-voice services was maintained at 25.1% of service revenues, but it would be more important to note that mobile data contribution continued to rise to 10.9%.

• Going forward, M1 has a few initiatives up its sleeve, which targets the high value segment. Its first such initiative was launched in 1Q09. Take 3 is gaining traction with about 20% of new subscribers taking up this plan. Take 3 offers a selection of data-centric handsets bundled with higher value plans, without requiring customers to purchase the handsets.

• On the back of better economic outlook with the recent spate of GDP upgrades, we have also
upgraded our topline inputs with subscriber growth of 4% to 6% till FY11. With M1’s tight cost management, we expect EBITDA margins to maintain at a high 45%.

• M1’s rollout of its backhaul network will be completed at end of 2009 and the cost savings will help to mitigate increased capacity requirements for higher data usage.

• Management is maintaining its policy to payout 80% of net profits in dividends. This puts yield at over 8% per annum. A 6.2 cent Singapore DPS was declared for 1H 2009.

• We maintain a BUY rating on M1, which offers a 20% upside to its fair value of S$2.03/share. M1 is gearing up to participate as a Retail Service Provider in Singapore’s Next Generation National Broadband Network project, which is scheduled to come onstream in April 2010. This opens up a new revenue stream as well as potential for cross service bundling opportunities.

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