Dividend surprise

While M1’s FY13 core net profit missed our estimate (94% of our forecast), its dividend exceeded our raised expectations. The earnings miss was largely due to higher-than-expected opex. However, its core net profit met consensus expectations(98% of FY13 estimates). M1 proposed a final DPS of 7.1 Scts and a special DPS of 7.1 Scts, bringing the full-year total to 21 Scts (121% payout),up 44% yoy. The take-up of tiered data plans surged 17%pts qoq to 49%,which we believe offset the lower international roaming revenues. We cut our FY14-15 EPS by 6-14% and DCF-based (WACC 7.2%) target price by 7.3%. However,M1 remains an Add with the dividend surprise and rapid take-up of tiered data plans acting as likely re-rating catalysts.

An accounting matter

FY13 earnings missed our estimates as more Android devices were sold vs. iPhones. M1 smoothens out the iPhone subsidy by recognising a large part of the future revenues to offset the subsidy, while the subsidy for an Android device is expensed off without recognising the revenue upfront. Also, the higher-than-expected labour and traffic costs hurt FY13 earnings.

Data growth offsets lower roaming revenues

The adoption of tiered data plans surged 17% pts to 49%, ahead of our expectations, and appears to have offset the decline in international roaming revenues. This is indicated by post-paid ARPU which seems to have bottomed out (Figure 3). International roaming revenues now make up 10-12% of total revenues vs. 12-15% previously. The users of tiered data plans pay S$3/month more than the users of the old plans (5% of post-paid ARPUs), while the lower data bundles force heavy data users to upgrade.

Rapid fixed broadband take-up

A key growth driver is fixed broadband, which formed 8% of the total revenues in FY13 vs. 6% in FY12. The fixed broadband revenue was driven mostly by the take-up of lower-end plans as indicated by the rapid 6% qoq and 13% yoy fall in 4Q13 ARPUs (Figure 1). The subscriber base rose 10% qoq and 64% yoy.

Delivered on dividends

M1’s total FY13 DPS of 21 Scts was above our estimate of 19 Scts which we had raised from 16 Scts earlier.

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