M1 – OCBC

Likely key NBN beneficiary

Starting up from ground zero. MobileOne (M1) is likely to be one of the biggest beneficiaries of the NBN (National Broadband Network) initiative when it starts rolling out from mid-2010. While M1 is the fairly new kid on the block, it has been honing its know-how in the residential market by piggybacking on StarHub’s infrastructure to offer cable broadband services. And to fast track its preparation for the commercial sector, M1 acquired Qala – a nine-year old Internet service provider specializing in offering broadband services to business customers – for S$14.9m (may pay a further S$3m if Qala meets certain financial targets up to Jun 2011). According to M1, it intends to use this ready platform to derive synergies and further grow the business as a full service operator.

On more equal footing with peers. Starting from a very low base, we believe that M1 is likely to benefit the most from this as it would be able to offer fixed line broadband services on an equal footing. It will also be able to make its maiden foray into the more lucrative corporate broadband arena with Qala. However, we do believe that the NBN rollout will also introduce an initial period of flux for everyone as price competition (especially in the corporate arena) could hot up. But the NBN also brings new opportunities for M1 – with the ultra-high speed capability of the NBN, the next area that M1 could venture into is pay TV over the Internet, or IPTV, just like what SingTel is offering with its mioTV.

Maintain mobile market share. On its main mobile business, M1’s most important task is to maintain its market share. We believe that the recent deal to distribute the Apple iPhone 3GS by the end of 2009 should allow M1 to reduce its monthly churn as well as arrest the slide in post-paid ARPU as smartphone users tend to subscribe to higher price plans. No  doubt that M1 had earlier expected the tough operating environment to remain, we think that M1’s defensive business and strong cashflow generation should allow M1 to continue to pay up to 80% of its recurring income as dividend. As such, we maintain BUY with S$2.12 fair value.

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