M1 – DBSV

Trading at ~8 yield

Net profit of S$42.5m beat our S$40m forecast due to lower depreciation charge

FY11F/12F profit raised by 4% each after adjusting for lower depreciation; cost saving is non-cash items, but dividends are tied to earnings

M1 is trading at projected 7.7% yield (bi-annual payment) versus 7.1% for StarHub (quarterly)

Unexciting mobile ARPU trend. A slight concern is the mild drop in adjusted postpaid ARPU to S$56.1 from S$58.8 in 4Q10 and S$59.6 in 3Q10. This may be due to seasonality and fair value accounting. Additional data-revenue seems to be lower than expected and M1 could be overstating handset revenue at the cost of future service revenue. A key positive was lower depreciation and amortization expense, which stood at S$25m versus S$30m in 4Q10 and S$28m in 1Q10, as some assets were fully depreciated.

Steady progress in non-mobile business. New fixed business revenue was S$7m, up 9% QoQ and 19% YoY. M1 estimates it has one third of the ~16K customers that are using the National Broadband Network. It believes competition among international bandwidth providers ensured leasing was a viable option for its fixed line business.

DCF-based TP remains S$2.60 (WACC 8.4%, terminal growth 0%). M1 projects S$100m capex in 2011, excluding S$22m paid recently for spectrum, which would be used for 4G-LTE rollout. Although its official dividend policy is 80% minimum payout, we project M1 to maintain 100% payout like in 2010, given its solid free cash flow and below 1x net debt to FY11F EBITDA.

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