M1 – DBSV

Single-digit growth ahead + 6.5% yield

At a Glance

• 1Q09 net profit was above expectations mainly due to lower depreciation charges.

• Market may be disappointed, as M1 did not announce capital management. Management would review capital structure in 2Q10 though.

• Our FY10F/11F earnings are raised by 4%/7% on the back of upbeat guidance from management.

• Any share price weakness should be a buying opportunity. BUY with revised TP of S$2.28.

Core earnings growth of 8% yoy. 1Q10 net profit of S$39.3m (-6% yoy, +6% qoq) was better than our expectations of S$37m. Excluding one-off tax credit of S$5.5m in 1Q09, it represents 8% yoy core earnings growth in 1Q10. The quarter benefited from lower depreciation expenses of S$27.7m (-11% yoy, -16% qoq) as some assets had fully depreciated in 2009.

Improved market share for the fifth consecutive quarter. Mobile market share stood at 25.8% (versus 25.7% in 4Q09 & 25.2% in 1Q09) as prepaid mobile subscriber share improved while post-paid market share was stable. Churn rate declined significantly to 1.4% (1.6% in 4Q09 & 1Q09 each), lowest ever since introduction of mobile number portability in 2008.

Capital management disappointment. M1 did not announce capital management citing working capital requirements, which stood higher in 1Q10, potentially due to more iPhones sold under the “Take 3” program. M1 intends to review capital structure in 2Q10 after considering working capital requirements.

Growth prospects emerge for FY10F and beyond. Management guided for improvement in FY10F earnings compared to stable earnings guidance earlier. This could be attributed to lower depreciation charges. FY11F and FY12F earnings should benefit from (i) National Broadband Network launch in 2H10F and (ii) content-sharing regulations paving the way for its pay TV entry. Our TP is based on 13x FY10F PER (historical average 12x) due to better growth prospects.

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