M1 – DMG
Forget 2011, Look To 2012
We keep our BUY rating on M1 following the in line 3Q/9MFY11 results released on 17 October. We expect its fixed (fiber) revenue streams to gain momentum in 2012 as the company benefits from the wider footprint of its own NGNBN OpCo allowing for greater wholesale cost savings. The recent introduction of new bundled plans should drive stronger revenue growth through 4QFY11, coinciding with a seasonally stronger quarter and the launch of the new iPhone 4S. We like M1 as it offers arguably the strongest exposure to the NGNBN with share price supported by a sustainable dividend yield of 6-7% (80% payout policy reaffirmed) for FY11/12.
Bottleneck issues should be behind soon. We expect much of the bottleneck issues (largely at the OpenNet level) afflicting the slow take-up of the NGNBN services in Singapore thus far to resolve by end- 2011/1Q2012. M1 indicated at the recent 3QFY11 results call that interest on its entry level fiber plan (Singapore’s cheapest offering at SGD59/mth for 100Mbps) has picked-up with greater awareness in the market. M1 said 40-45% of the 16k fiber customers recorded as at 3QFY11 were added during the quarter, translating into some 7k new additions although it was not able to guide on its share of the market. This contributed to the 77% y-o-y growth (+9% q-o-q) in fixed services revenue for the quarter. It believes there are at least 12k broadband users on cable/ADSL coming out of contracts which presents a good potential catchment. M1 deployed its own NGNBN OpCo in Sept with its geographical footprint widening to 100% by end- 2011 from 50% currently. The company saves up to SGD31 in wholesaling cost per customer by linking its fiber customers across its own OpCo than the government mandated Nucleus Connect.
All is not lost without Vodafone. M1 was not able to quantify the impact from the impending cessation of its 7 year Vodafone global roaming agreement. Management stressed that multiple roaming arrangements in place, including the Asian Mobility Initiative (AMI) through Axiata would still provide a fallback and the decision to not proceed with the renewal will not have a significant impact. We believe all is not lost as the Vodafone agreement entails strict volume commitments that M1 could have found prohibitive given the scale and its roaming traffic profiles, and it would be able to save substantially on fees paid to Vodafone by not renewing the partnership.
Still a BUY- underappreciated. Management has maintained capex guidance of SGD100m for FY11 with 9MFY11 run-rate at 85% (OpCo cost built into 3QFY11). We believe there is lower risk of capex surprising on the upside post FY11 even with the launch of LTE. This portends further capital management opportunity but historical precedence would suggest that M1’s management typically errs on the conservative, taking cue from external economic conditions and developments. Still, we believe the stock’s sustainable 6% dividend yield is an adored attribute in the current economic environment.