M1 – DBSV
Focused on market share gains
• Net profit of S$40.8m (+10% yoy) and interim dividend of 6.3 Scents in line. Market share gains for the fifth consecutive quarter.
• FY10F revised up 4%, no change to FY11F, adjusting for fair value accounting (FVA)
• FY10F capex guidance lowered to S$100m from S$100m-120m. Due to FVA, we switch from PER to DCF based (WACC 8.4%, terminal growth 0%) TP of S$2.30.
Fifth consecutive quarter of mobile market share gain. M1’s overall mobile market share continued to inch up and reached 26.2% in 2Q10 (26% in 1Q10) from the low of 25.2% in 1Q10. Post-paid mobile share has been stable at 26.5% while pre-paid share increased to 26% from 23.7% in 1Q10. We estimate operators take longer time (5-6 months compared to 3-4 months earlier) to breakeven on the acquisition costs of new iPhone subscribers. However, Net Present Value (NPV) over 2-year contract period is higher for iPhone subscribers. With 7% yield plus capital management potential intact, we believe M1 is an attractive investment.
Fair value accounting for handsets, supports stable dividends. Under FVA, M1 expenses the handset costs during the period they are incurred. However, a part of the future service revenue over the contract period, attributable directly to the handset is recognized upfront as handset revenue. While FVA results in timing mismatch between earnings and operating cash flow, it does indicate the real profitability of subscribers on a quarterly basis. M1 is using FVA so as to prevent large swings in its earnings, which has implications for its dividends. With higher FY10F earnings, 80% dividend payout ratio should lead to higher dividends, as free cash flow should still exceed 80% of net profit. We expect FY11F earnings to still grow in FY11F, although not as much as without FVA policy.