M1 – Phillip

Within expectations

4%y-y increase in profits for the quarter on track to meet our full year estimates

Lower handset sales due to higher sales of cheaper phones

Fibre broadband client base reached 16k

Establishment of OPCO translates OPEX into CAPEX

Maintain Hold recommendation with target price of S$2.50

3QFY11 in line with our full year estimates

M1 reported 3QFY11 revenue and profits of S$245mn & S$41mn respectively. The key highlight of the quarter is the significant increase in Fixed service revenue due to significant Fibre take up rates during the quarter. The company’s Fibre client base now stands at 16k as of the quarter end. Revenue contribution from handset sales declined 12% due to sales of cheaper phones in the quarter.

Establishment of own OPCO would reduce OPEX into CAPEX

M1 established its own OPCO for the provision of broadband services. By having its own OPCO, M1 would be able to save on connection fees paid to Nucleus Connect of S$21 & S$75 for residential & corporate customers and translates OPEX into CAPEX. The company’s guidance of an initial S$10mn CAPEX for establishing their own OPCO appears very low. Its network roll out had already reached 50% and upon completion of its rollout, 80-90% of M1’s broadband customers would be served by their own OPCO.

M1’s Postpaid ARPU declined sequentially due to early recognition policy

As mentioned earlier in our reports, M1 employs a fair value accounting policy for the sales of its IPhone plans. Consequently, its Postpaid ARPU booked in the quarter continued to decline as part of the contract revenue had been realised earlier upon initial sale. However, underlying postpaid ARPU remained stable at S$63-64/mth. M1 also reported net adds of 7k & 34k postpaid & prepaid mobile customers for the quarter on low churn rates of 1.3%.

Valuation

We value M1 using a DCF method (WACC: 6.6%, terminal g: 0%) to arrive at our target price of S$2.50. We maintain our view that current market price fairly reflects M1’s outlook and recommend that investors Hold the stock for dividend yields of 6%.

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