M1 – OCBC

Softer 2Q12 earnings

• 2Q earnings 15.4% below forecast

• Not expecting stable performance for FY12

• Paring fair value to S$2.80 from S$2.81 Softer-than-expected 2Q12 showing

M1 Ltd reported a softer-than-expected set of 2Q12 results yesterday. Revenue of S$232.2m was down 5.3% YoY and 11.5% QoQ, or 7.1% below our estimate. Management explained that the lower revenue was due to lower handset sales. Due to a change in sales mix, with nearly 70% of its post-paid customers adopting an Android phone, which subsidies are expensed upfront, net profit tumbled 17.8% YoY and 12.7% QoQ to S$35.2m, or 15.4% below our forecast. Meanwhile, M1’s 1H12 revenue fell 1.6% to S$494.7m, making up 45.0% of our FY12 forecast; while net profit slipped 11.5% to S$75.5m, or 45.8% of our full-year estimate. Nevertheless, M1’s interim dividend remains at S$0.066/share, unchanged from last year.

Removes stable outlook guidance

Going forward, M1 expects capex to be around S$120m, versus its earlier S$110-130m guidance. But we note that management has not reiterated its “stable performance at both top and bottom-line” guidance. Instead, M1 guided that the strong interest in new high-end smartphones seen in 2Q will contribute to revenue growth over a two-year period. It also expects handset subsidies expensed upfront to have an immediate impact on profitability, but believes that margins will recover over the 2-year contract period. Meanwhile, M1 is looking to be the first telco in Singapore to have a nation-wide 4G smartphone and dongle coverage by end-3Q. However, the adoption of this new technology could take up to 2 years to reach an optimal level, the higher roll-out cost could depress near-term margins.

5.4% lower FY12 earnings forecast

In view of M1’s latest guidance, we are revising down our FY12 revenue forecast by 3.4% (mainly on lower handset sales) and earnings by 5.4% (on weaker margin outlook). We also kept our FY13 revenue forecast but cut earnings by 2.6%. However, with our DCF-based model, the earnings cut only has minimal impact on our fair value, reducing it from S$2.81 to S$2.80. Lastly, free cashflow remains strong, reflecting M1’s defensive earnings and ability to sustain a dividend payout ratio of 80%. Maintain BUY.

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