M1 – UOBKH

Mobile And Agile

Triple-play riding on NGNBN. M1 will enhance customer retention by bundling multiple services. Traditionally a mobile and IDD service provider, M1 will expand into fixed voice and fixed broadband services with minimal capex when Next Gen Nationwide Broadband Network (NGNBN) is launched by mid-year. M1 budgeted capex of only S$10m for capacity to serve 100,000 fixed broadband customers and we expect 20,000 and 40,000 new subscribers to sign up in 2H10 and 2011 respectively. M1 could also deliver niche educational content through an IPTV platform, riding on infrastructure provided by NGNBN.

Growth in mobile data enhances ARPU. M1 benefits most from the proliferation of smartphones and growth in mobile data as mobile services accounted for 79.4% of its total service revenue in 4Q09, the highest among the three local telcos. The proportion of post-paid subscribers using smartphones has expanded to one-third over the past six months driven by the launch of Apple iPhone in Dec 09. Mobile service plans bundled with data are priced at about S$10 above those without data. Thus, we expect post-paid ARPU to increase by 4.1% over the next two years.

Rewarding shareholders with special dividend. We expect M1 to declare a special dividend of S$0.17/share when it announces 1H10 results in early August. Together with forecast interim dividend of 6.2 cents and final dividend of 6.4 cents, total dividend for 2010 is estimated at 29.6 cents. Management sees optimal net debt/EBITDA at 1.5x. We expect net debt/EBITDA to reach 1.1x in Dec 10, which leaves room for potential capital reduction exercise in 2011 or 2012. Initiate coverage with a BUY. Valuation is attractive with 2010 EV/EBITDA at 6.3x, compared to 10.3x for SingTel. We estimate 2010 free cash flow at S$0.21/share, representing free cash flow yield of 10.0%. The stock provides rich dividend yields of 14.2% for 2010 and 7.2% for 2011. Our DCF valuation for M1 is S$2.84 (required rate of return: 8.5%, terminal growth: 0%).

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