M1 – CIMB

Growth momentum to continue

3Q09 results preview

Maintain Neutral, target price of S$2.00 and earnings forecasts. We maintain our earnings forecasts and DCF-based target price of S$2.00 (WACC: 9.5%, LT growth: 1%) for M1. M1 remains our top pick in the sector despite our NEUTRAL rating. While we see a lack of price catalysts, downside should be limited by its attractive yields of 8% and best exposure to wireless broadband and NGNBN. We remain UNDERWEIGHT on the sector as we prefer higher-beta sectors given our positive view of the market.

Growth trajectory to continue. M1 is slated to release 3Q09 results on 16 Oct. The growth shown in 2Q should continue in 3Q. We expect core net profit growth of 2-8% qoq to hit the S$38m-40m mark, up 10-18% yoy, although we note that 3Q08 was marred by MNP-related costs. Sales growth should be 3-5% qoq or 0-2% yoy while EBITDA margins should be flat qoq. We believe that 3Q09 sales would continue to improve as usage should perk up as the economy comes out of a recession and as IDD and roaming revenue begins to flow in again. The development of its wireless broadband business (mobile data was about 10.9% of 2Q09 service revenue) should provide another fillip to growth. Finally, M1 has been emphasising new customer segments such as youths and foreign professionals.

Cost controls in place. M1’s unyielding focus on cost containment has helped to sustain and even lift its margins, although masked by Take 3. 2Q09 EBITDA margins touched 41% from 38.6% in 1Q08. We believe that active cost controls would continue, especially in the areas of staff costs (9.4% of revenue), leased circuit costs as it builds its own backhaul (6.8%) and other cost of sales (10.4%).

iPhone deal. M1 announced that it has reached an agreement with Apple to import iPhones into Singapore, which would break SingTel’s exclusivity on this handset. Details on pricing, tariffs and availability will be released over the next 3-5 weeks.

Slightly positive. We are slightly positive over the deal as the appeal of the phone should help shield M1 from churns and allow it to protect and even raise its market share. Moreover, we see the iPhone as an ARPU stimulator through higher data usage. SingTel has revealed in the past that ARPUs from iPhone users are 1.5x higher than from normal postpaid users.

On the flipside, we believe that M1 will be fairly aggressive on pricing and will have to absorb the resultant margin impact as it expenses costs upfront. It has yet to decide whether to include the iPhone as part of Take 3. Even if included, most handsets should still remain sold on non-Take 3 plans. On top of that, we believe that SingTel has locked up the bulk of the pent-up demand for this phone and M1 would be left with more marginal users or slower adopters.

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