M1 – DBSV

100% payout likely to continue

At a Glance

• 4Q10 net profit was broadly inline with expectations.

• Including special DPS of 3.5 Scts, full year DPS of 17.5 Scts represents 100% earnings payout ratio.

• Management guided for improved net profit in 2011, as per expectations.

• Maintain BUY at over 7% yield assuming 100% payout.

4Q10 net profit of S$37.5m (+1% yoy, -5% qoq) was inline. Full year net profit of S$157.1m was up 4.5% yoy on the back of lower leased circuit costs, which declined 20% yoy to S$44.1m as M1 started to use more of its own backhaul network.

Mobile market share was stable while churn rate declined further. Mobile market share was stable sequentially at 26.3%. M1 made gains in the post-paid while lost in the pre-paid segment. Churn rate declined to 1.3% in 4Q10 from 1.4% in 3Q10. (1.6% in 4Q10 each), lowest ever since introduction of mobile number portability in 2008.

100% earnings payout likely in FY11F in our view. While official earnings payout guidance remains at 80%, we think there is a strong likelihood of 100% payout in FY11F, given that: (i) M1 has guided for a flat yoy FY11F capex of S$100m; and (ii) working capital changes should be neutral or positive compared to S$84m in FY10 due to fair value accounting. A free cash flow yield of 8%-10% could easily support a 7% dividend yield.

Management guidance of “growth in net profit” in FY11F. M1 attributes this to: (i) higher broadband contribution from both SME and residential segments; (ii) more effective bundling of its pay TV (web TV), broadband and mobile services. We have slightly trimmed our FY11F earnings a to account for possibly lower roaming fee.

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