M1 – Phillip
3Q09 results. For 3Q09, M1 reported operating revenue of S$188.4m (-4.2% yoy) and net profit of S$34.2m (-0.7% yoy).
Mobile telecommunications services and international call services posted decline in revenue to S$140.8m (-5.6% yoy) and S$31.8m (-1.6% yoy) respectively. Mobile telecommunications revenue fell due to the competitive tariff and bundling discounts. For international call services, it was because of the decrease in roaming traffic. Meanwhile, fixed network services reported revenue of S$0.6m. Moreover, handset sales increased slightly to S$15.3m (+0.4% yoy) because of higher sales volume.
In line with revenue, operating expenses was also lower at S$146.1m (-4.4% yoy) because staff cost, facilities expenses, provision for doubtful debts and other general and administrative expenses declined.
M1’s net profit decreased slightly as revenue fell more than operating expenses.
Profit margin. Because of lower revenue, the net profit margin was lesser at 18.2% in 3Q09 compared to 19.5% in 2Q09. However, the net profit margin of 18.2% in 3Q09 was higher than 17.5% in 3Q08 as a result of lower operating expenses.
Mixed results for market share in 3Q09. The number of post-paid customers rose by 0.8% from 886,000 in 2Q09 to 893,000 in 3Q09. However, its post-paid market share fell from 26.5% in 2Q09 to 26.0% in 3Q09. Furthermore, the number of prepaid customers rose by 5.2% from 783,000 in 2Q09 to 824,000 in 3Q09. This caused its pre-paid market share to improve from 24.5% in 2Q09 to 25.0% in 3Q09. We feel that M1 should continue to work on improving its post-paid market share against bigger rivals SingTel and StarHub through innovative products, advertising and promotion programs as well as attractive discounts.
Outlook for FY2009. M1 highlights that operating conditions remain challenging despite the recovery of the global economy. It mentions that operating revenue remains under pressure. Nevertheless, it anticipates net profit to be comparable to 2008. It will offer iPhone by the end of the year and we expect this to help M1 achieve a larger increase in the number of post-paid customers.
Maintain Hold with fair value at S$1.78. We have a hold recommendation as M1 is likely to achieve limited growth in the local telecommunications market. Using the free cash flow to firm model, we derive a fair value of S$1.78. The dividend yield for the stock is 7.2%.