M1 – DBSV

On track to >10% EPS growth in 2010

At a Glance

Net profit of S$39.5m (+15.5% y-o-y) in line, revenue up 10% q-o-q driven by higher iPhone sales

Overall market share inches up to 26.3%

No change to FY11F, broadband earnings should underpin mid single digit growth

Maintain BUY with TP S$2.50, c. 7% regular yield at 80% payout ratio may be enhanced further

Comment on Results

3Q10 results in line. Revenue was up 10% q-o-q and 30% y-o-y to S$246m, as handset sales jumped 56% q-o-q, on the back of higher sales of the newly introduced iPhone4. This was largely offset by higher handset subsidy costs, and net profit of S$39.5m (+15.5% yo-y, -3.2% q-o-q) was in line with our estimates. Improved market share for the sixth consecutive quarter. Mobile market share stood at 26.3% (versus 26.2% in 2Q10 & 25.6% in 3Q09) as prepaid mobile subscriber share improved while post-paid market share remained stable. Churn rate remained low at 1.4%.

Recommendation

Broadband earnings in FY11F should offset slightly weaker mobile earnings due to FVA. We project broadband revenue to grow to S$41m (+45% yoy from low base) in FY11F, and increasing to S$54m in FY12F, mainly on the back of SME business. While EBITDA margins for broadband business are likely to be below 30%, net margins should be similar to mobile division’s 20% net margins, due to negligible depreciation expenses.

Close to 7% yield from 80% earnings payout ratio. If M1’s capex to sales ratio for FY11F is lower than our assumed 12%, free cash flow would higher, which could lead to special dividends or capital management. The recent 3G spectrum award from the IDA for S$20m held no surprises as there was no new player and all 3 telcos avoided a bidding war, thus keeping capex costs low. Maintain BUY with DCF-based TP of S$2.50 (WACC 8.5%).

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