M1 – CIMB
A smooth tone for 1Q
• In line; maintain NEUTRAL. When annualised, M1’s 1Q11 result was in line with ours at 3% below and also consensus at 3% ahead of theirs. As expected, no dividends were declared. The key features of 1Q were i) lower revenue due to seasonality and weaker handset sales and ii) margin recovery. We lower our FY11-FY13 forecasts by 0.3-0.6% as we factor in the additional cost of the recent 1800 MHz spectrum which lowers our interest income. Our DCF-based (WACC: 8.5%) target price falls to S$2.63 from S$2.65 because of this. We maintain NEUTRAL as M1 lacks catalysts but this is balanced by it benefitting from soaring inbound visitors and having the most upside from NGNBN. It remains our top Singapore telco pick.
• Revenue declined. Revenue declined by a slim 2% qoq on the back of lower postpaid revenue and handset sales. Postpaid revenue decline due to seasonality where there were shorter days and less calls were made. Handset sales reduced by 2% qoq as the volumes sold were lower due in part to seasonality and also because some of the iPhone 4 related craze had partially dissipated.
• Margins recovered. As expected, EBITDA margins recovered, climbing by 1.1% pts qoq as it was lifted by i) lower handset costs due to lower volumes sold, ii) lower leased circuit costs as M1 cut over more traffic onto its own backhaul and iii) lower marketing cost due in part to seasonality. M1 is expected to retain the 42-43% service EBITDA margins for FY11 (42.2% in 1Q) despite potentially incurring more NGNBN-related costs in 2H11 as most of those costs are variable in nature and M1 will not spend too heavily on either opex/capex.
• Fibre still not meaningful. The fixed network revenue (mostly from NGNBN) contributed about 3% of revenue in 1Q11. M1 expects the fibre subscriber base to grow as coverage widens and will also be more aggressive in marketing as this occurs. M1 estimates that it has about one-third of the fibre market which currently totals about 16K as reported by the press. Most of the fibre customers are from the residential segment and most of the subscriber base are opting to sign on for the lower speed plans as opposed to the higher speed plans.