M1 – DBS

Improved execution

• Net profit exceeded our expectations as M1 arrested market share decline, without hurting the margins.
• Added 50K new subscribers in the quarter, compared to a loss of 12K in 1Q09
• Announced interim dividend of 6.2 cents per share. Reiterate BUY for 12% potential share price upside, 9% regular yield and an additional 10-20% yield through potential capital management in FY10F.

In 1H09, M1 has achieved 51% of our FY09F forecast. Core net profit of S$37m (+5% y-o-y excluding S$6m one-off gain last year, +3% q-o-q) exceeded our S$33m forecast, due to lower staff costs, network related expenses and lower than expected increase in marketing expenses. We like to highlight that M1 has negotiated lower network expenses for FY09F, which alone should result into annual cost savings of about S$10m. Management declared interim dividend of 6.2 cents, flat yoy, in line with our expectations.

Operating metrics look better. Most importantly, mobile market share decline was arrested. It stood at 25.5% compared to 25.4% in 1Q09. ARPU was stable as minutes of usage showed some improvement sequentially. Churn rate of 1.5% was slightly lower than 1.5% in 1Q09.

M1 may not remain undervalued with signs of improved execution. Next year, M1 would benefit from about S$10-15m cost savings from the shifting of traffic to M1’s own backhaul network, implying room for earnings growth. Management is also enthusiastic about benefits from National Broadband Network in 2010. Maintain Buy with target price of S$1.80, pegged at 11x PER, a 10% discount to our StarHub’s target PER of 12x.

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