M1 – Phillip

Below expectations

Company Overview

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

broadband market.

  • 6.0% Q-Q decline in Net profits on higher operating expenses, including higher cost of handset.
  • 2.9% q-q increase in service revenue positive.
  • Nationwide LTE coverage, higher iPhone 5 subsidies likely to increase post-paid customer base.
  • Upgrade to Neutral, with new TP of S$2.41.

What is the news?

M1 reported 6.0% q-q decline in Net profits due largely to higher operating expenses, including higher cost of handset. Service revenue was however positive, with increases in revenue contribution from all three major categories.

How do we view this?

Although net profits were low, and EBITDA margins declined for the 5th consecutive quarter since 2Q11, we are upbeat on the improvement in service revenue, while noting that handset subsidies will be recovered in future quarters. We think that the nationwide LTE coverage and the higher iPhone 5 subsidies given by M1 compared to its peers would further increase its post-paid customer base. We see potential for fibre to significantly contribute to M1’s net profit, although this may take time as current profit margins are likely lower than its more established peers.

Investment Actions?

We adjust our figures to reflect 3Q12 earnings. With the current uncertainty in the macro economic environment, and as the search for positive real returns continue, M1’s dividend yield of 5.5% remains attractive at current prices. Fundamentally, M1’s service revenue growth continues to be healthy, while we do not expect any potential headwinds, other than a possible spectrum auction bidding war, for which M1 has the ability to compete in, possibly through an increase in borrowings from banks. We therefore upgrade our rating to “Neutral”, with a new TP of S$2.41.

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