M1 – Kim Eng
• Special dividends could become the normal order of business for M1 as capital needs stabilise. Following the declaration of a special DPS of $0.03, management has promised to regularly review the company's capital structure. Depending on comfort level viz gearing, additional payouts could range from $0.03 to $0.21 a share. Beyond this, 2011 prospects are also becoming more concrete and exciting.
• Although M1 did not declare more than $0.03/share in special dividends in FY10, we expect to see more capital management initiatives given management's promise to "regularly review" its capital structure. Given its healthy net debt/EBITDA of 1.0x, stable working capital requirements and consistent capex, we continue to put M1 on our list of capital management candidates.
• By our estimates, M1 will have the flexibility to pay a further S$0.03/share in special dividends by the end of FY11 even if it maintains its net debt/EBITDA ratio at a rather conservative 1.0x. This will rise to $0.21/share if it gears up to a more aggressive 1.5x, still a level that management has, in the past, expressed it is comfortable gearing up to.
• Business‐wise, M1's traction is gathering strength. It expects full year earnings growth, with a key driver being mobile data (est. 30% penetration vs 150% for mobile voice) due to the proliferation of mobile devices such as smartphones and in particular, tablet computers. It will also enhance its fixed service offerings and more aggressively target the underserved SME market.
Action & Recommendation
We believe this is just the beginning of an exciting year for M1 and investors should stay invested. The share price may see some consolidation given the recent outperformance, but at 13x PE and 6% yield, we reckon the best is yet to be.