M1 – OCBC

LIKELY STABLE 2Q12 SHOWING

2Q12 earnings likely to be S$41.6m

Likely beneficiary of faster NBN connection rate

Laggard among telcos

Likely stable 2Q12 showing

M1 Ltd is due to report its 2Q12 results on 16 Jul, where we expect the telco to put in a relatively stable showing. We forecast for revenue to come in around S$250m, up 1.9% YoY, but net profit to fall 2.8% YoY to S$41.6m. On a sequential basis, revenue is likely to fall 4.8%, but net profit should climb 3.2%.

May benefit from stepped-up NBN connection rate

On the NBN front, IDA (Infocomm Development Authority) now requires OpenNet to, starting from Aug, increase its weekly customer connection by nearly 30% to 3,100 from a revised 2,400. This is to reduce the waiting time, which was reported to be as long as six weeks. In addition, IDA has asked OpenNet to put in place a process to cater for sudden spikes in demand, especially during the quarterly computer trade shows. We believe that the increased connection rate would benefit M1 most. This is because M1 1) has a small base, 2) does not have much of a legacy system issue since its current cable modem bandwidth is leased from StarHub, and 3) could further

penetrate into the corporate segment, especially in the more price sensitive SME space.

Laggard among the telcos

Year-to-date, M1's share price has only risen 2.4%, as compared to SingTel's 11.0% climb and StarHub's 24.4% increase over the same period. One reason for M1's underperformance is probably linked to its lack of bundling of services. But we think this concern is probably overdone, given that M1 has been able to defend its mobile market share, despite it having the highest churn rate among the three telcos. And because M1 is not involved in the highly competitive Pay TV arena, it does not have to deal with rising content costs. As a result, M1 is experiencing less pressure on margins. We continue to like M1 for its defensive earnings and relatively attractive dividend yield of 5.7%. Maintain BUY with S$2.81 fair value.

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