M1 – DB

Maintain cautious stance and Hold rating with new S$2 TP

New S$2 TP on fixed-line upside but still cautious on fundamentals, Hold

We include potential fixed-line upside into our M1 estimates, which raises our TP 25% to S$2. But M1’s fundamental outlook remains challenging and we caution against excessive optimism that the National Broadband Network will significantly alter M1’s competitive positioning or growth profile. M1’s late entry into a mature fixed-line market entails substantial execution risks while near-term margins are under pressure. M1 remains our least preferred Singapore telco. But the potential for capital return should provide near-term price support, hence maintain Hold.

Late-entry into fixed-line market presents significant execution risks

M1 is likely to face an uphill task in gaining significant scale as a late entrant into a mature fixed market. With limited service differentiation, it is difficult to see how M1 can encourage significant subscriber churn from STel and STH, unless it is willing to sacrifice margins by competing aggressively on price (a strategy management has indicated to us they will not pursue). We are cautious of substantial NBN execution risks and are not particularly convinced it will significantly improve M1’s competitive positioning and growth profile. Furthermore, the growing emphasis on fixed-line could become an increasing management distraction and impact M1’s performance elsewhere.

Revenue estimates raised but margins now assumed to compress harder

With the impending NBN launch, we now include estimates for M1’s fixed-line business into our forecasts. This raises our FY10e-12e revenue projections 8-19%. But we assume greater margin compression than previously assumed (on costs of developing fixed-line services and expected increase in NBN-driven competition) and project FY10e EBITDA margin to fall 1.5% pt YoY, causing net profit to flat-line (in-line with management guidance). Our FY10e-12e forecasts are 2-11% below Consensus estimates, largely due to our lower margin expectations.

DCF-derived TP; key risks include competition and fixed-line execution

Our TP is raised to S$2 (+25%), primarily reflecting the potential upside from M1’s fixed-line business (which we now include in our estimates). Our TP implies 12.2x FY10 PE. We value M1 using DCF analysis based on 7.2% WACC and 0% terminal growth rate reflecting the long-term ex-growth nature of Singapore’s telco market. Key risks include competition, fixed-line execution and capex

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