M1 – OCBC

Pays S$21.7m for additional wireless spectrum

S$21.7m for more wireless spectrum. M1 Ltd has paid S$21.7m to secure a lot of the 1800 MHz spectrum which can be used for 2G, 3G or other technologies. According to the Straits Times (ST)1 , the winning bid is 54x the reserve price of S$400k set by IDA (Infocomm Development Authority). M1 also edged out SingTel and StarHub during the week-long auction; but we understand it was done via an open-tender system, suggesting that there was demand for it, given that it is probably the last block in the 1800 MHz band. The IDA had earlier allocated three blocks of 3G (1900 – 2100 MHz) spectrum – one each to the three incumbent telcos – for S$20m each. Meanwhile, the next spectrum rights for 4G – the next generation of wireless services – will go on the auction block next year, where the government will ask for bids for at least four lots.

Additional bandwidth much welcome. While M1 did not elaborate on how it plans to use the spectrum, management says that “M1 is investing for the future”, which could include providing for next-generation services. ST also quoted management as saying that the extra spectrum will benefit travelers roaming on its network, including those from Asia using older 2G handsets. But from a practical perspective, network congestion is getting to be a very real issue, brought on by the continued proliferation of Internet-ready devices. According to IT research firm Analysys Mason, it expects the total number of mobile broadband connections in developed Asia-Pacific region to increase from 6.2m in 2009 to 27.2m in 2015 (28% CAGR); it also expects mobile broadband revenue to jump 3x from US$2.4b in 2009 to US$7.1b in 2015. Hence, having the extra spectrum will give M1 more flexibility and help to sustain the quality of service.

No major financial impact. In the ST article, M1 also said it did not expect the additional spectrum to bring down costs. In any case, we do not expect the latest S$21.7m spending to have any substantial financial impact. Given that the spectrum license will run out by 31 Mar 2017, we note that the amortization expense is around S$1.4m. While the S$21.7m spending is over and above its stated S$100m capex budget for this year, we do not foresee any issue with the company funding it either via debt (net gearing ~1.01x as of end Dec 2010) or from their positive operating cashflow (M1 generated S$187.4m in FY10). More importantly, we believe that it should not affect its ability to pay out at least 70% of its underlying net profit as dividends. Maintain BUY with S$2.79 fair value.

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