M1 – AmFraser

No major surprises, forecasts maintained

• Headline 1Q10 net profit fall of 6% YoY to $39.3mil, is masked by a tax benefit in 1Q09 which lowered effective tax rate to 5%.

• Otherwise, results were in line with expectations on the back of a strong economic recovery. Pretax rose 9% YoY to $47.8mil.

• Mobile service revenues which account for 79% of total service revenues, grew 2% YoY to $143.3mil. With resumption of foreign worker influx, prepaid subscribers were a bigger growth contributor (+17% to 863,000) YoY basis. This helped offset 8% YoY fall in prepaid ARPU to $15.

• More encouraging is that postpaid net adds were a stronger 7,000/mth in 1Q10 (to 933,000), vs 5,700 for prepaid. M1’s launch of iPhones in December 2009 also helped

churn to fall to 1.4% from 1.6% in FY09. While postpaid ARPU of $59.7 maintained at 1Q09 level, this was a slight 2% decline from 4Q09.

• Uptake for M1’s fixed network services contributed $5.9mil revenues, an increase from $5.3mil in 4Q09 when its acquisition of Qala Singapore (renamed M1 Connect) was first consolidated. Despite the upcoming launch of NGNBN, management does not expect a big bang effect as about 20% of coverage will only be addressable in the early days.

• With M1’s recent launch of iPhones and rising demand for smartphones, handset sales surged almost four-fold YoY to account for 27% of total revenues. Typically handset sales account for 8% of total revenues.

• Sales of higher value-add phones bode well for data usage. M1 improved non-voice services to 29.8% of mobile service revenues in 1Q10. Separate data plan subscriptions doubled to 318,000 from 1Q09. M1 continues to upgrade its network in FY10 to achieve 42Mbps.

• Along with handset sales, handset subsidies surged, largely contributing to 42% jump in total expenses.

• Couple of bright spots at expense level: (1) cost savings from the completion of its backhaul network has started to come through with a 15% YoY fall in leased circuit cost to $11.2mil (2) fall in overall deprecation rate as some fixed assets have been fully depreciated.

• On balance, we are comfortable maintaining our forecasts. Stock is now trading at less than 15% upside to our fair value estimate of $2.29. We maintain HOLD rating.

• Dividend yield is also less compelling now at 6-7% p.a., after share price appreciation of 83% over the past 17 months since its low.

• To reflect the group’s strategy to develop from a predominantly mobile base to become a multi-service telecom provider, the group is changing its name from MobileOne Limited to M1 Limited.