M1 – Phillip
Full Year Results
M1 is the 3rd largest Telecommunications company in Singapore. The introduction of NGNBN in Singapore lowered entry barriers to the Fixed Line business, which would allow M1 to venture into the corporate and retail
• Profits missed, despite 4.5% growth
• Higher handset sales contributed to strong top line
• Consensus expectations could be too high
• Downgrade to Reduce with revised TP of S$2.36
What is the news?
M1 reported a decent set of results for FY11. Revenue increased by 8.8%y-y, mainly due to strong growth in handset sales. Management attributed the strong handset sales to an increase in sales volume and unit selling price. International calling service revenue declined by 3%, despite a 22% increase in international retail minutes recorded. The company also announced a final dividend of 7.9cents, translating to a full year payout ratio of 80%.
How do we view this?
The results were marginally below our expectations of S$170mn. M1 uses a fair value accounting method to record the sales of its iPhones that partly contributed to the strong top line recorded for its handset sales. Despite higher value smartphone plans sold, postpaid ARPU was only stable sequentially and declined by 1.6% y-y in 4QFY11. We view that as a reflection of the inability to monetize mobile service revenue, in spite of high subsidy on the more expensive smart phones.
In our earlier report, we caution that M1’s pricey valuations are a reflection of high expectations of the company’s prospects. While we expect M1 to benefit from the structural shift in market structure with the introduction of NGNBN, we believe that the stock price could face near term headwinds from margin pressure and unexciting management guidance of prospects for next year. After revising our earnings estimates, we downgrade our recommendation on M1 to Reduce.