M1 – DBS

Consistent strategy but sector woes

• Lower data pricing and discounts on mobile services are being offered in the market now.
• M1 may find it difficult to compete in the mobile and broadband segments, given rising competitive intensity in the sector. Our FY10F earnings lowered by 6% due to higher opex.
• M1 has outperformed STI by 8% since our upgrade on 22 Jun 09. Downgrade to HOLD with revised TP of S$1.95

Intense competition in the post-paid mobile segment. We observed that all the telcos are offering 50% discount on their published mobile data plans in order to encourage users to adopt data plans. As a result, ARPU may not rise much, while network capex may rise substantially, as data traffic typically consumes manifold network capacity than voice traffic. In addition, M1 and StarHub, on top of the usual handset subsidy, are offering discount of S$100 to the customers who switch from other operators. This may adversely impact the margins of the telcos.

Higher competition may be a trend, not an occasional spike. We see competitive intensity going up rather than coming down in 2010. SingTel’s EPL pricing of S$23/month (compared to StarHub’s min s$25) despite higher content cost vindicates our fear of aggressive customer acquisition targets. Recently, M1 secured iPhone deal and raised its FY09F capex by 20%, indicating an aggressive agenda ahead. StarHub faces an uphill task of defending its mobile and broadband market share, while realizing that pay TV market share is liklely to decline next year. Our FY10F earnings lowered by 6% due to higher opex. Our target price is S$1.95, still pegged to 12x average FY10F EPS. The stock trades at reasonable 7.3% yield for stable earnings prospects. With higher capex requirements, we see lower possibility of capital management in FY10F.

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