M1 – DBS

Capital management potential

• We expect at least 9% cash yield from capital management in addition to 7% dividend yield.
• Not much risk to stable FY10F earnings, despite higher competition, due to cost savings from
backhaul network.
• M1 has slightly underperformed STI by 1% since our downgrade on 22 Oct 09. Upgrade to BUY with revised TP of S$2.15 based on 13x FY10F (12x earlier)

We estimate S$160m-185m (DPS of 18-21 Scents) from potential capital management exercise. In the past, M1 has returned excess cash regularly to shareholders except for 2008 and 2009, when capex was
higher due to the construction of the backhaul network. M1 is past its peak capex in 2009 with the completion of the backhaul network. Our model suggests that M1 can easily pay out S$160m-S$185m to its shareholders, based on its free cash flow. Paying out S$160m in capital management would raise its net debt to EBITDA from 0.7x to 1.2x, still well below its target 1.5x-2.0x.

Would it be special dividends or capital reduction? M1 has done both in the past. We believe that options would be one-time special dividend, special dividends at regular intervals or capital reduction. In any case, we expect the share price to benefit from these actions. We believe that a capital management exercise could be announced with 1Q10F results.

Backhaul savings of S$10-15m helps to underpin stable FY10F earnings. We use 13x PER compared to 12x previously to account for capital management potential in FY10F. Based on 13x FY10F PER, our revised target price is S$2.15.

Leave a Reply