M1 – Kim Eng

Stay close to home

Event

• By now, it should be clear that the “sell in May and go away” cliché has taken strong hold of the market as the last reporting season saw no upgrades, whether in terms of forecasts or recommendations. If anything, most companies flagged rising costs this year as the biggest stumbling block to growth. In such times, we believe investors should stick close to defensive stocks such as M1. A 100% dividend payout will translate to a

highly attractive yield of 7%. BUY.

Our View

• For FY11, we think M1 will have the added catalyst of a possible dividend encore. Last year, the company paid out 100% of its earnings, adding a special dividend of 3.5 cents a share on top of the ordinary dividend of 7.7 cents a share. Looking at its capex trends, we think there is the possibility of a similar payout this year. We upgrade our dividend forecast for FY11 from 14.5 cents a share to 18 cents a share, assuming a 100% payout ratio against the typical 80%.

• M1’s Long Term Evolution (LTE) network, which is Singapore’s first 4G highspeed (300Mbps) wireless network, will be fully deployed by 1Q12. While a major item, it has always been part of the company’s upgrading plans. Therefore, we do not expect this year’s capex to stray beyond management’s guidance of $100m. With just $12m capex in 1Q11, the trend for the rest of the year should stay similarly tame. This should

enhance M1’s ability to pay more dividends.

• Unlike previous years when subscriber acquisition subsidies shot up due to Apple’s new iPhones, such costs should not be a concern this year with the proliferation of nonApple products. Although costs are likely to rise in 2H11 as M1 ramps up its NGNBNrelated sales activities, most of them will be variable in nature. In fact, as it cuts more traffic to its own backhaul transmission network this year, higher sales costs should be mitigated by lower leased circuit costs.

Action & Recommendation

Maintain BUY with a target price of $2.88, based on 16x FY11F earnings.

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