M1 – OCBC
HOLD with new S$3.37 FV
- 1H14 NPAT met 52% of FY
- Interim 7c dividend
- Mobile segment holding up well
2Q14 results mostly in line
M1 Ltd reported its 2Q14 results last evening, with revenue easing 2.0% YoY (down 0.2% QoQ) to S$239.7m, mainly due to lower handset sales (down 17.5% YoY and 15.3% QoQ) and international call revenue (down 19.9% YoY and 1.4% QoQ). Mobile revenue remained strong, up 3.4% YoY and 2.5% QoQ at S$167.9m, driven by post-paid subscriber growth (+2.9% YoY and 0.9% QoQ) and higher data usage (monthly post-paid ARPU +3.5% YoY and 0.7% QoQ at S$55.5). As a result of lower operating expenses (down 6.0% YoY and 1.0% QoQ), net profit grew 12.2% YoY and 2.7% QoQ to S$39.2m. 1H14 revenue though fell 1.6% to S$479.8m, meeting 47% of our full-year forecast, net profit rose 8.2% to S$86.7m, or 52% of our FY14 estimate. M1 also declared an interim dividend of S$0.07/share, versus S$0.068 last year.
Keeps moderate earnings growth outlook
Going forward, management believes that it can continue to achieve moderate earnings growth (within the single-digit range), aided by increased mobile data usage. M1 managed to increase the number of customers on tiered pricing plans from 54% in 1Q14 to 58% in the quarter, with a higher number of them (20% versus 16% in 1Q14) exceeding their data bundles. Nevertheless, management believes that the number of subscribers on tiered plans is likely to stabilize around 65%. Separately, M1 also saw its fixed services’ ARPU stabilizing around S$41.9/month (+0.5% QoQ), which should continue to hold up as it has ended its promotion of giving away 3-6 months of free subscription. Still, competition may continue to remain intense. Last but not least, M1 has kept its S$130m capex guidance due to ongoing upgrades to its network to LTE-Advanced.
New S$3.37 fair value
As the results were mostly in line, we opt not to change our estimates. However, we are improving our DCF-based fair value from S$3.30 to S$3.37, underpinned by a reduction in the risk-free rate from 2.5% to 2.3% (reflecting the fall in SGS 10-year bond yields). But given the limited upside, we maintain HOLD.