M1 – Phillip

2Q FY2009 results

2Q FY2009 results. For 2Q FY2009, M1 reported operating revenue of S$190.5m (-7.2% yoy), profit before tax of S$45.0m (-11.4% yoy) and net profit of S$37.1m (-9.7% yoy).

There are four main revenue segments: telecommunication services, international call services, fixed network services and handset sales. Telecommunication services registered 7.7% decrease in revenue to S$141.6m. Postpaid revenue fell by 8.5% to S$124.0m while prepaid revenue decreased by 2.2% to S$17.5m. Moreover, international call services posted 13.7% drop to S$32.8m while handset sales rose by 12.2% to S$15.6m. Fixed network services was a new segment that contributed revenue of S$0.5m.

Operating expenses also decreased to S$144.1m (-5.6% yoy) due to lower staff costs, facilities expenses amd provisions for doubtful debts. M1 benefitted from the Jobs Credit Scheme, paid lower bonus and hired fewer staff.

Therefore, net profit decreased due mainly to lower revenue despite lower operating expenses.

Profit margin. Net profit margin decreased from 22.5% in 1Q FY2009 to 19.5% in 2Q FY2009 due mainly to higher operating expenses. Based on a year-on-year comparison, it fell from 20.0% in 2Q FY2008 due to lower revenue.

Increase in number of customers. M1 saw an increase in the number of prepaid and postpaid customers from 740,000 and 879,000 in 1Q FY2009 to 783,000 and 886,000 in 2Q FY2009 respectively. Its market share for the prepaid and postpaid segments has changed from 23.9% and 26.8% in 1Q FY2009 to 24.5% and 26.5% in 2Q FY2009 respectively. We are concerned as M1 continues to lose market share for the postpaid segment. This is because M1 does not have Pay TV and is unable to offer bundled services to customers.

Outlook for FY2009. M1 expects 2009 to be a challenging year due to the global financial crisis. However, it expects the net profit for 2009 to be comparable to 2008. 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. We keep our hold recommendation on the stock because M1 has a limited focus on the domestic market and does not have Pay TV services. As M1’s net profit of S$37.1m only came in 3.6% below our expectation of S$38.5m, we maintain the target price at S$1.67 based on our valuation using the free cash flow to firm model.

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