M1 – CIMB

Mixed 4Q but rising expectations of capital management

• Upgrade from NEUTRAL to Outperform; results in line. FY09 core net profit formed 100% and 98% of our forecast and consensus. A final DPS of 7.2 cts brought full-year gross DPS to 13.4 cts (CIMB-GK: 13.7 cts) for a payout of 80%, also within expectations. We have trimmed our FY10-11 earnings estimates by 1-2% after some housekeeping. However, we maintain our DCF-based target price of S$2.07 (WACC 9.5%). M1 remains our top Singapore telco pick. We upgrade it to OUTPERFORM from Neutral on our view that there would be likely capital management in 2010 and market-share gains from NGNBN.

• Mixed 4Q. 4Q09 topline jumped 15% qoq on the back of a 2.4x surge in handset sales primarily from the sale of iPhones and full-quarter contributions from the broadband provider, Qala (now known as M1 Connect). Stripping away these items, service revenue improved a mere 1% qoq as postpaid revenue only rose 2% qoq while prepaid revenue was flat. M1 booked maiden revenue from Qala which resulted in a S$5.3m contribution to its fixed broadband business (S$0.6m in 3Q09). EBITDA margins were down 3.1% pts qoq in 4Q09, compressed by higher SACs from the usual festivities and its iPhone launch.

• Conservative 2010 guidance. While M1 aims to raise revenue and its mobile market share in 2010, it has guided for comparable earnings in 2010 vs. 2009, implying lower margins. We believe the guidance is conservative as M1 is concerned about rising competition from the launch of the Next Generation National Broadband Network (NGNBN), despite cost savings from its backhaul investments. We are more aggressive, projecting 11% net profit growth for FY10, on higher revenue driven by roaming and economic recovery and lower opex due to its backhaul.

• Clearest hint of capital management. M1 said it would review its capital structure following the re-financing of its S$250m loan in 1Q10 and amid more clarity on the sustainability of the economic recovery. Coupled with our projection that its net debt/EBITDA could fall to 0.4x by end-2010 (assuming no special dividend/capital reduction) from 0.8x in 4Q09, we are keeping our expectations of a special dividend or a capital reduction of 23.5 cts for FY10.

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