M1 – DBS

Yield plus opportunities ahead

• Recovery in mobile business coupled with key cost saving initiatives, should drive single-digit growth.
• While M1 has surged 13% since our upgrade on 22 June, there is more upside potential given its aggressive
broadband plans as revealed by management.
• Our target price is raised to S$1.95, still pegged at a 10% discount to StarHub’s target PER of 13x. BUY for 8% yield, potential upside of 15% and 10%-20% capital management yield in FY10F.

Recovery in mobile ARPU coupled with cost saving initiatives. With pick up in the Singapore economy, we expect mobile ARPU and subscriber growth to recover before the broadband and pay TV segments. This was evident in 2Q09 results of both M1 and StarHub. We understand that negotiation of lower network maintenance fee and continued offshoring of call centre operations should lead to cost savings of about S$10m each year. Another S$10-15m cost savings should accrue as more traffic shifts from leased-lines to M1’s
own backhaul network in FY10F. As such, our forecast of 6% yoy growth in FY10F earnings may prove conservative.

M1 keen to defend mobile market share before attacking broadband market. M1 management disclosed its aim to achieve over 20% broadband market share by 2015, through the National Broadband Network (NBN) opportunity, translating into top line growth of about15-20%. However, we would wait to include any numbers from broadband until we see the execution plan. Meanwhile, M1 is committed to defend its mobile market share (25.4% currently) with initiatives such as “Take 3” plan targeting high-end customers.

Buy with revised TP of S$1.95. Our target price is pegged at 12x FY09F PER (11x earlier) still pegged at a 10% discount to StarHub’s target PER of 13x. Unlike its peers, M1 is not affected by falling broadband price and rising content costs.

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