M1 – DBSV

Difficult to find positives except 6% yield

1Q12 profit slightly below expectations. Net profit of S$40m (5% y-o-y) was slightly below expectations of S$42m. Higher postpaid acquisition cost (S$363, +10% y-o-y) and lower than expected “fixed service” revenue were key culprits.

Slow growth in new business. Fixed service revenue stood at S$11.8m versus S$10.6m in 4Q11 as M1 added 7K fiber subscribers to take its base to 29K. Long waiting time in activating broadband subscriptions continues to be a challenge.

Our Views

Mobile trends are not encouraging. Postpaid mobile market share declined for the fourth consecutive quarter to reach 25.9% versus 26.0% in 4Q11 & 26.6% in 1Q11. While smart phone subscribers comprise 69% of its postpaid subscriber base, they do not generate higher ARPU as M1 had projected in fair value accounting for handsets. Adjusted postpaid ARPU fell 6% y-o-y to S$52.9.

Dividends safe but capital management unlikely in 2012/13. Regulator IDA plans to auction spectrum in 1800MHz, 2.3GHz and 2.5GHz bands in 2013. Telcos should be keen to acquire these spectrums as the current use for the 1800MHz band will expire in 2017 and the remaining two bands in 2015. M1 had previously bi S$21.7m for 30 MHz block of 1800MHz spectrum in April 2011 valid for 7 years. The new spectrums auctioned will be valid for 13 15 years and therefore hold more value for telcos.

Recommendation

HOLD for 6% dividend yield. The stock is trading at 13x FY12F PE (+1SD valuations). Among the telcos, StarHub is the most expensive at 17.5x (+2SD valuations) and 6% yield. SingTel is the cheapest at 12x (hist. average) and offers superior growth plus 5% yield, although it is in the middle of re-organization.

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