M1 – OCBC

Deployment of LTE by 1Q12

Deployment of LTE by 1Q12. M1 Ltd recently announced that it will deploy South East Asia’s first commercial LTE (Long Term Evolution) network in Singapore by 1Q12. M1 has awarded a five-year contract valued at S$280m to Huawei – a leading provider for next-generation telecommunications network solutions for global mobile operators – to provide turnkey LTE solution; this includes installation of macro base stations, distributed base stations and Evolved Packet Core (EPC), for M1’s island-wide next-generation network.

Investing for the future. LTE is capable of delivering downlink speed of up to 300Mbps (versus the current HSPA network which supports 21Mbps) and is specially designed for the efficient carriage of data traffic. We view this development positively, as the demand for mobile data transmission will only continue to grow, fueled by the proliferation of smart devices (phones, tablets and other personal entertainment devices) and also the “stickiness” of new social media. Hence, the network will enable rich multi-media applications such as video conferencing, high-definition content transmission, highspeed video downloads and social network updates.

Timely due to shifting preferences. Recall that M1 had previously paid S$21.7m to secure a lot of the 1800 MHz spectrum, which we understand could also be used for LTE. We view these recent developments as timely due to shifting preferences. As mentioned earlier, we have observed a growing preference towards using instant messaging (via the generous data plans currently) to communicate versus voice – the traditional money churner for the mobile operators. For M1, we note that the post-paid monthly MOU (minutes of usage) has eased to 356 minutes in 1Q11 (down from 364 minutes in 4Q10), while post-paid monthly ARPU has dipped to S$56.1 in 1Q11 from S$58.5 in 4Q10 and S$59.7 in 1Q10. But once the next-gen network is in place, we believe that M1 should be able to offer differentiated services and capture these changing preferences; of course, this is assuming that there are available “4G” devices that can fully utilize the LTE network.

No additional capex needed. In any case, we understand that this LTE move has always been part of M1’s upgrading plans, and hence we do not expect M1 to incur any extra capex this year (or even the next) i.e. capex spending should remain around S$100m, implying no impact on its ability to pay out 70% of its recurring earnings as dividends. As before, we continue to like M1 for its defensive earnings and good dividend yield, hence we maintain BUY with a DCF-based fair value of S$2.79.