M1 – OCBC
EXPECTING MORE OF THE SAME IN 2012
•FY11 earnings are in line
•Margin erosion likely seasonal
•Guides for stable FY12
FY11 results mostly in line
M1 Ltd reported FY11 results, which came in mostly in line; revenue grew 8.8% to S$1064.9m, or around 4% ahead of our estimate, boosted by slightly stronger-than-expected handset sales (M1 revealed that it sold a good number of Apple iPhone 4S without contracts). Net earnings came in at around S$164.1m, or just 0.5% shy of our forecast. And as expected, M1 declared a final dividend of S$0.079 per share, bringing the total dividend to S$0.145, or 80% of core earnings as guided.
Margin erosion likely seasonal
While its service EBITDA margin was steady at 39.2% in 4Q11 (41.4% in 4Q10, 42.1% in 3Q11), we note that its overall EBITDA margin slipped to 23.3% (29.6% and 32.4% over the same period). M1 explained that it was due to the strong demand for the new iPhone 4S and seasonal promotion for other smartphones. This also caused acquisition cost to shoot up to S$423/post-paid user (S$368 in 4Q10). However, management expects the cost to start easing in the coming quarters. Post-paid (adjusted) ARPU was stable at S$53 in 4Q11 versus S$53.9 in 3Q11. Data ARPU rose slightly to S$23.1 from S$22.2 in 3Q11; and this could improve further as M1 is looking at new strategies to re-price its data plans using LTE.
Stable financial guidance for 2012
For 2012, M1 expects to maintain stable performance at both top and bottom-line, citing the more uncertain global economic outlook and its potential impact on roaming revenue. It has also kept its 80% dividend payout ratio and expects to spend some S$110-130m in capex. To account for its outlook and results, we are bumping up our FY12 revenue forecast by 4% but are lowering our earnings forecast by 4%. But due to likely lower working capital requirements and capex expenditure in the near future, our DCF-based fair value inches up from S$2.79 to S$2.81. We continue to like M1 for its defensive earnings and greater NBN potential – maintain BUY.