M1 – DMG

1HFY12 Results Review note

M1 surprised on the downside with 1HFY12 results that missed the street and our estimates, no thanks to the accounting treatment for Android handsets, which clobbered EBITDA margin. Management has maintained its dividend payout ratio of 80% of earnings, which would imply a lower absolute payout for FY12 given the pressure on earnings. We cut our FY12/13 forecasts by 9%-12% post results to err on the conservative and downgrade the stock to NEUTRAL, with a revised DCF FV of SGD2.66. We are also moderating our DPS assumption for FY12 to 14 cents/share.

Below forecasts. M1’s core earnings, when annualized, were 12%-16% below our and consensus estimates. The key disappointment came from an accounting anomaly in the treatment of Android handsets which deviated from the usual fair value accounting it adopts for the iPhone (amortization over the life of the contract). M1 expensed upfront the cost of Android smartphones, which made up 70% of all smartphones sold in 2Q12. This hammered margins even as the subsidies on the models fell, as evident from the decline in subscriber acquisition cost (-12% q-o-q). The telco estimates that 25% of its total base comprises Android handsets versus 50% for the Apple iPhone.

IDD, fixed services revenue down q-o-q. To our surprise, service revenue contracted 0.7% q-o-q (+1% y-o-y), dragged down by weak IDD revenue (-7% q-o-q) and fixed services revenue (-4.2% qo-q). M1 said IDD sales were hit by the lower roaming revenue after Singapore and Malaysia signed a reciprocal agreement to lower roaming tariffs in 2011. Despite booking in another SGD7m in wholesale cost to expand its fiber footprint, its fixed service revenue was still down sequentially as there was a one-off sale of fixed equipment in 1Q12. M1 netted 7k fiber subs in 1Q12 to 37k, which translates into a fiber market share of some 21%-23% based on management’s estimate.

Tiered data plans by September. M1 said it will introduce tiered data plans when its LTE service goes nationwide in 3Q12 but did not provide any details. Both M1 and StarHub have yet to respond to Singtel’s earlier move to lower its data caps.

Dividend payout may be at risk. While M1 kept its dividend payout guidance at 80% of earnings, it would appear that the absolute dividend for FY12 could potentially be lower due to the earnings impact arising from the accounting mismatch. Management was unable to provide guidance on whether this impact would stretch into 2H2012. We cut our FY12 and FY13 core earnings forecasts to SGD156.8m and SGD187.7m respectively from SGD177.4m and SGD206.8m previously to build in mid-term earnings pressure from the upfront expenses relating to Android handsets. Our DPS estimate is cut accordingly, although M1’s dividend yield is still a decent 5%, which should provide some share price support.

M1 – DMG

1HFY12 Results Review note

M1 surprised on the downside with 1HFY12 results that missed the street and our estimates, no thanks to the accounting treatment for Android handsets, which clobbered EBITDA margin. Management has maintained its dividend payout ratio of 80% of earnings, which would imply a lower absolute payout for FY12 given the pressure on earnings. We cut our FY12/13 forecasts by 9%-12% post results to err on the conservative and downgrade the stock to NEUTRAL, with a revised DCF FV of SGD2.66. We are also moderating our DPS assumption for FY12 to 14 cents/share.

Below forecasts. M1’s core earnings, when annualized, were 12%-16% below our and consensus estimates. The key disappointment came from an accounting anomaly in the treatment of Android handsets which deviated from the usual fair value accounting it adopts for the iPhone (amortization over the life of the contract). M1 expensed upfront the cost of Android smartphones, which made up 70% of all smartphones sold in 2Q12. This hammered margins even as the subsidies on the models fell, as evident from the decline in subscriber acquisition cost (-12% q-o-q). The telco estimates that 25% of its total base comprises Android handsets versus 50% for the Apple iPhone.

IDD, fixed services revenue down q-o-q. To our surprise, service revenue contracted 0.7% q-o-q (+1% y-o-y), dragged down by weak IDD revenue (-7% q-o-q) and fixed services revenue (-4.2% qo-q). M1 said IDD sales were hit by the lower roaming revenue after Singapore and Malaysia signed a reciprocal agreement to lower roaming tariffs in 2011. Despite booking in another SGD7m in wholesale cost to expand its fiber footprint, its fixed service revenue was still down sequentially as there was a one-off sale of fixed equipment in 1Q12. M1 netted 7k fiber subs in 1Q12 to 37k, which translates into a fiber market share of some 21%-23% based on management’s estimate.

Tiered data plans by September. M1 said it will introduce tiered data plans when its LTE service goes nationwide in 3Q12 but did not provide any details. Both M1 and StarHub have yet to respond to Singtel’s earlier move to lower its data caps.

Dividend payout may be at risk. While M1 kept its dividend payout guidance at 80% of earnings, it would appear that the absolute dividend for FY12 could potentially be lower due to the earnings impact arising from the accounting mismatch. Management was unable to provide guidance on whether this impact would stretch into 2H2012. We cut our FY12 and FY13 core earnings forecasts to SGD156.8m and SGD187.7m respectively from SGD177.4m and SGD206.8m previously to build in mid-term earnings pressure from the upfront expenses relating to Android handsets. Our DPS estimate is cut accordingly, although M1’s dividend yield is still a decent 5%, which should provide some share price support.

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