M1 – CIMB
• Results in line. M1’s 1Q10 core profit was in line with our expectations but at the higher end of consensus at 25% and 26% of ours and market’s full year forecast respectively. As expected, no dividends were declared. M1 raised its FY10 net profit guidance, which does not surprise us. We tweak our FY10-12 core earnings forecast by 1.5-2.8% as we bump up our revenue and lower margin for higher handset sales and trim depreciation assumptions. However, our target is unchanged at S$2.26. We maintain TRADING BUY as we see M1 having the most capacity for capital management, the most upside from NGNBN and it would benefit over the long-term from the recent content carry regulation.
• Strong topline but flattish service revenue. As previewed, topline showed tremendous strength rising by 34% yoy and 15% qoq due to the full quarter impact of iPhone sales. Service revenue was fairly flattish qoq due to seasonally lower postpaid revenue which negated the higher prepaid revenue (from a larger base), higher IDD revenues (from higher traffic) and growth in fixed broadband revenue.
• Diluted margins. EBITDA margins declined by 5.7% pts qoq to 30.8% in 1Q10, the lowest in memory due to iPhone subsidies which pushed handset costs higher by 67% qoq. Subscriber acquisition cost rose to S$369, or 22% qoq, because of the subsidies but should peak in 1Q10. Service EBITDA margins fell by 1.6% pts qoq as higher handset costs were offset by lower traffic expense, leased circuit cost and advertising and promotional cost. Core profit rose by 8% yoy and 6% qoq due to lower depreciation as some components of the 2G assets were fully depreciated.
• Higher guidance. M1 raised its FY2010 net profit guidance from “comparable” to an improved earnings relative to 2009. We are not surprised and had highlighted its rather conservative guidance. The main drivers for the raised guidance are savings from commissioning its own backhaul, higher roaming revenue from a recovering economy, opening of the 2 new IRs and new revenue streams from its fixed broadband business. Our original FY10 core net profit was 5% above consensus.