M1 – OSK DMG

A Seasonally Weaker Quarter, Roaming Revenues Stay Under Pressure

There were no surprises in M1’s 1QFY13 results, which reflected typical seasonality and the extended weakness in roaming revenue. Management expects margin upside to be capped as subscriber acquisition cost (SAC) will likely remain high. We maintain our core earnings forecasts, which assume a two-year CAGR of 14.5%. Our FV remains at SGD2.70, based on DCF (10% WACC). Maintain NEUTRAL.

Weaker roaming revenue set to persist. We remain concerned over the decline in M1’s roaming revenue – which makes up 12%-15% of its overall mobile revenue – as it is suffering from a growing number of travelers opting for connectivity via Wi-Fi. To mitigate the pressure on traditional roaming revenues, M1 has signed agreements with operators in over 120 countries to provide unlimited Wi-Fi data roaming services.

9% of subs consuming data in excess of bundle. M1 revealed that 20% of its postpaid subscribers are on tiered data plans, with 9% of these subscribers exceeding their data bundle – average revenue per unit (ARPU) uplift of 8%-10%. This suggests that it is only able to monetize 2% of its postpaid base on its LTE plans. Average data consumption on smartphones has exceeded 2GB/month vs 1.6GB/month a year ago.

Flattish fiber subs addition. Although M1 grew its fiber customers to 60k in 1QFY13, subscriber net additions have been relatively flat, at 8k, in the past two quarters. Its share of the fiber additions have also been on a decline, a reflection of the more aggressive acquisition campaigns and bundling promotions by SingTel and StarHub. Management does not see the absence of premium content as a hindrance in growing its fiber business.

Share price playing catch-up. M1’s share price has risen 11.3% YTD, which could indicate a laggard play following its relative underperformance vis-à-vis its peers in 2012. Management has reaffirmed its previous net profit guidance of ‘moderate growth’ and capex guidance of SGD130m-SGD150m for FY13 (excluding 4G spectrum cost). We make no changes to our core earnings forecasts of SGD161m and SGD192m for FY13 and FY14 respectively. NEUTRAL.

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