Disappointing 3Q09

• Maintain NEUTRAL. As we raise our capex assumptions to bring them in line with M1’s latest guidance, our earnings forecasts drop by 0.7-1.5% for FY09-11. Our DCF-based target price, however, rises to S$2.07 (WACC 9.5%, LT growth 1.0%) from S$2.00 as we adopt a lower 10% (11% before) capital-intensity forecast for FY11 onwards. Maintain NEUTRAL as we continue to see a lack of catalysts. This is counterbalanced by M1’s 7% yields, upside from NGNBN and M1’s best exposure to wireless broadband. While management is coy, we believe that capital management will occur in FY10. We raise our DPS forecast for FY10 to 38 cts/share from 14.7 cts/share translating into yields of 20.5% from 7.8% before. This is based on 1.0x net debt/EBITDA which is consistent with past practice.

• In line. 9M09 results were in line at 74% and 73% of our full-year forecast and consensus respectively. While in line, 3Q09 was disappointing on three counts: weaker revenue and margins qoq and higher churns. No dividend was declared, as expected. We have trimmed our earnings forecasts by 0.7-1.5% for FY09-11 as we incorporate higher capex assumptions.

• Topline reversed course. M1’s topline dropped 1.1% qoq in 3Q09 from +2.2% qoq in 2Q09 because of lower postpaid (-1.1% qoq) and IDD (-3.3% qoq) revenue. Postpaid ARPU contracted 1.3% qoq, affected by competitive tariff plans, bundling discounts and lower roaming which also dented IDD revenues. In spite of a gradual economic recovery, M1 expects near-term revenue to remain under pressure as it has yet to see a firm and sustainable rebound in spending.

• Margins suffered a similar fate. EBITDA margins also drifted down by 1.4% pts qoq because of higher handset costs (17.3% of revenue) from higher volumes sold and higher staff costs (9.9% of revenue).

• Guidance mostly intact. M1 left its guidance for stable PAT yoy intact, but raised its capex budget to around S$120m from S$100m because of a faster rollout of its backhaul upgrade.

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