M1 – CIMB
Lower-than-expected capital management
• In line. At 3% below our forecast and 1% below consensus, FY10 net profit was in line with expectations. M1 declared a final DPS of 7.7 cts and a special DPS of 3.5cts, bringing FY10 DPS to 17.5 cts for a 100% payout. Nevertheless, the special DPS fell short of our 10ct/share projection. We cut our FY11-12 earnings by 1-2% for housekeeping purposes and introduce FY13 forecasts. While we make no changes to our DCF-based target price of S$2.65 (WACC: 8.5%), we downgrade the stock from OUTPERFORM to NEUTRAL as M1 has outpaced the market by 6% since we upgraded it last July and because of the lower-than-expected capital management in 4Q10.
• Strong topline but weak margins. Topline rose 6% qoq in 4Q10, led by higher handset sales (+17% qoq) as smartphones remained popular, principally iPhones. The topline was also boosted by postpaid revenue (+3% qoq) as postpaid net adds touched 25K, the highest since our records began in 2004. Meanwhile, margins in 4Q10 dipped 3.1% pts qoq due to higher handset costs as more handsets were sold, staff costs due to the payment of bonuses and performance incentives and higher marketing expenses.
• Capital management fell short of our expectations, though that was better than nothing. M1 was vague about the frequency of capital management going forward although it would review this from time to time. It frames its dividend policy on the long-term sustainability of its payouts and considers its current policy as fairly aggressive. We believe M1 is being slightly conservative as its net debt/EBITDA of 1.0x at end-4Q10 was healthy, its working capital stable and its capex manageable.
• Guidance for 2011. M1 expects full-year profit growth and capex of S$100m in addition to sustaining its 80% payout. Growth in 2011 would come from mobile data given low penetration rates and the increasing number of devices carried around by individuals, its fixed service offerings and penetration of the underserved SME market. It would also focus on new initiatives such as near field communications and location-based applications.