M1 – CIMB

Keeping our faith in capital management

• In line; upgrade to Outperform. 1H10 core profit met our forecast and consensus, forming 49% and 51% of the respective FY10 numbers. An interim dividend of 6.3 cts was declared for 2Q10, representing a payout of 71%, in line with our forecast. 2Q10 revenue fell qoq following a strong 1Q led by iPhone sales, but margins improved as handset subsidies abated with lower handset volume. We leave our FY10-FY12 forecasts intact but cut our special DPS expectations from 23.5 cts/share to 10 cts/share due to higher working capital requirements from an increased stock of higher-value smartphones. We assume capex will be funded by borrowings, freeing up cashflows for special dividends. This also lowers our DCFbased target price (WACC: 8.5%) to S$2.20 from S$2.26. Despite this, we upgrade M1 from Neutral to Outperform given our strategists’ more cautious view on the market, M1’s defensive qualities and likely capital reduction/special dividend of 10 cts/share, and a beneficiary of soaring inbound visitors.

• Drop in revenue… 1H10 topline declined 10% qoq primarily because of lower handset sales as take-up of iPhones slowed owing to a lack of stock and as consumers waited for iPhone 4. Service revenue was flat as lower IDD revenue (from lower wholesale revenue) and prepaid revenue was offset by stronger postpaid revenue from a larger subscriber base and higher usage. Postpaid net adds were strong owing to good take-up of iPhones in Apr-May and participation in IT shows while prepaid net adds rose as more promotions were rolled out.

• …and costs. EBITDA margins jumped 4.7% pts qoq as handset costs fell (-36% qoq) on lower volumes sold. Other operating costs were stable qoq as lower leased line costs (-12.2% qoq) from more migration to its own backhaul transmission network were offset by higher traffic costs and wholesale costs for fixed services.

• Capital management ruled out for now. M1 also declined to provide a timeline for this. Despite acknowledging its capacity to return more cash and noting the revision in the government’s GDP growth forecast to 13-15% from 7-9% for 2010, M1 is still cautious over the economy. It would, however, re-visit this issue next quarter. We still believe it would pay a special dividend as its net debt/annualised EBITDA of 0.9x is below its limit of 1.5x and the economy continues to recover.