M1 – OSK
Shifting to Higher Gear
M1’s FY09 results were largely in line with our and consensus estimates. Following this, we raise our FY10/11 forecasts by 0.3-3%, which accordingly increases our target price to SGD2.30 (from SGD1.90) based on DCF. M1 remains a good dividend play, with the re-rating catalysts coming from the NGNBN rollout in 2Q10, improved mobile spending and progressive capital management. Our recommendation is upgraded to a BUY from NEUTRAL given the 17% upside to our revised target.
In line. M1 reported 4Q09 and FY09 core earnings of SGD37.2m and SGD150.3m respectively, in line with our and consensus full-year forecasts of SGD148.7m- SGD150m. Core earnings grew 2% y-o-y (+8.5% q-o-q) in 4Q09, reversing 2 consecutive quarters of decline. This was against the 11% y-o-y revenue expansion (+14.7% q-o-q) led primarily by increased handset sales. Postpaid revenue rose 2% q-o-q, the fastest since 2Q07, alluding to stronger roaming revenue in line with the nascent economic recovery. EBITDA margin held up well q-o-q but was 1.6%-points higher at 44.2% in FY09 on lower bad debt provision and facilities expense, which more than offset higher overall cost of sales. The key takeaways were: (i) the more than doubling in handset sales, both y-o-y and q-o-q as it benefitted from the launch of the iPhone 3Gs in early Dec ’09, and healthy take-up of its Take 3 bundling program; (ii) improved mobile revenue traction as the economic recovery momentum gathered pace; and (iii) the 3%-points rise in non-voice as a percentage of service revenue. Management has proposed a 7.2 cents/share final dividend, which renders full year dividend at 13.4 cent/share net, consistent with the regular dividend payout commitment of 80%.
Capex not exceeding SGD120m for FY10. M1 intends to upgrade its current HSPA+ offering to reach 42Mbps in 2010. A live trial of LTE is slated for next month. The guidance is for capex of SGD100-120m for FY10 (FY09: SGD119m) with little incremental capex (approx. SGD10m) required for NGNBN implementation.
Capital management upside. We expect more proactive capital management and hence the return of surplus cash to shareholders. More clarity would follow that of the re-financing of a SGD250m debt due later this year.
NGNBN fillip. We see M1 gaining most from the rollout of NGNBN, especially within the retail/residential (ADSL/cable) and enterprise segments where it would be able to compete on a more level playing field. We have upgraded our FY10/11 earnings by 0.3-3% following the FY09 results, mainly to factor in the improved fixed and mobile revenue traction and handset sales. Management’s guidance is for FY10 core earnings to be on par with FY09. Our DCF target price has been nudged higher to SGD2.30 from SGD1.90 (WACC: 10.1%; TG:1.5%) previously. Upgrade to BUY.