M1 – CIMB

Cutting the line with Vodafone

Roaming and corporate lines to cease

We view negatively M1’s decision to end its partnership with Vodafone from 31 Dec 11 as this may shave M1’s core net profit by 5-10%, based on our estimates. M1 has a roaming partnership with Vodafone whereby users of Vodafone or Vodafone partners roam on M1’s network in Singapore. We also gather from the industry that Vodafone provides mobile telephony for multinational companies through M1. We maintain our NEUTRAL rating on M1 although there are risks to our forecasts and DCF-based target price of S$2.63 (WACC 8.5%) as a result of the cessation of the partnership. M1’s share price should be supported by its fairly attractive dividends. SingTel is our top Singapore telco pick.

The news

M1 announced it is ending its 7-year partnership with Vodafone from 31 Dec 11. M1 has a roaming partnership with Vodafone whereby users of Vodafone or Vodafone partners roam on M1’s network in Singapore. M1 still has roaming partnerships via the Axiata group and Asian Mobility Initiative, a regional grouping of networks which includes Celcom (Malaysia), DTAC (Thailand), Idea (India), Smartone (Hong Kong and Macau), Sun Cellular (Philippines), and XL Axiata (Indonesia).

Comments

Negative development. We are negative on this news as we believe roaming revenue from Vodafone and its partners forms a substantial part of M1’s inbound roaming revenue which contributes an estimated 8-10% to its total revenue. Assuming the Vodafone partnership contributes 20-30% to M1’s inbound roaming revenue, ending it could shave about 2-3% and 5-10% off M1’s revenue and core net profit respectively.

Vodafone also supplies business products (such as Blackberry devices and dongles) at lower prices, and provides M1 users preferential roaming arrangements on Vodafone and Vodafone-partner networks. We also gather from the industry that Vodafone provides mobile telephony for multinational companies (MNCs) through M1. We believe MNCs will gradually shift to Vodafone’s new partner network when their contracts expire.

We believe Vodafone will soon ink a new partnership with SingTel or StarHub for roaming and mobile telephony services in Singapore.

Valuation and recommendation

We remain NEUTRAL on M1 thanks to its fairly attractive dividend yield 6-7%. This is despite downside risks to our earnings forecasts and DCF-based target price of S$2.63 as a result of the cessation of the partnership. SingTel is our top Singapore telco pick.

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