Still ‘Appletizing’

We maintain BUY on M1, with FV adjusted to SGD4.20 (WACC: 7%, terminal growth: 1.5%) from SGD4.30, a 16% upside. Its re-rating catalysts are: i) continued revenue market share gains, ii) stronger take-up of fiber plans and iii) better data monetisation efforts. The fair value accounting on the iPhone should see M1’s service EBITDA margin bucking the trend in 4Q14, a typically strong quarter for handset sales.

  • An indirect ‘beneficiary’ of the iPhone. The overwhelming demand for the recently launched iPhone 6 (IP6) and tight supplies for the larger screen iPhone 6+ (IP6+) in Singapore suggests a likely shift in the Android dominated handset sales mix for 4Q14/1QFY15. This should indirectly benefit M1 as it books upfront revenue from iPhone contracts to partially offset the device subsidy (fair value accounting), which should result in a smaller EBITDA impact vs its larger peers. M1’s EBITDA margin as a percentage of service revenue grew 1-6 ppts q-o-q in 4Q12 and 4Q13 during the launch of the previous iPhone 5 (IP5) and iPhone 5s (IP5s) respectively.
  • Firing the latest fiber salvo. M1 recently slashed the price of its 1Gbps fiber plan by 50% to SGD49.00/month, marginally undercutting a similar plan offered by MyRepublic. While there are concerns that the latest move could lead to further value destruction in the fixed broadband space via a fresh round of price competition, we view this as a tactical response to strengthen M1’s triple-play bundling proposition and an attempt to narrow the gap with its larger peers, which are aggressively locking-in customers on multiple services. Being the smallest of the Tier- 1 fiber service provider, M1 stands to gain somewhat from competition with no legacy broadband revenue to cannibalise. Its home-bundling proposition should be catalysed by the implementation of cross-carriage, which should allow pay-TV subscribers to access premium content.
  • Data monetisation. We expect M1 to better monetise data going forward with the recent introduction of fresh 4G plans and higher data consumption, resulting in more customers exceeding their bundled data allowances. Subscribers on M1’s previous tiered plans will also likely be subjected to a 4G VAS surcharge after 31 December, providing some average revenue per user (ARPU) uplift.

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