3Q09 results

3Q09 results. For 3Q09, M1 reported operating revenue of S$188.4m (-4.2% yoy) and net profit of S$34.2m (-0.7% yoy).

Mobile telecommunications services and international call services posted decline in revenue to S$140.8m (-5.6% yoy) and S$31.8m (-1.6% yoy) respectively. Mobile telecommunications revenue fell due to the competitive tariff and bundling discounts. For international call services, it was because of the decrease in roaming traffic. Meanwhile, fixed network services reported revenue of S$0.6m. Moreover, handset sales increased slightly to S$15.3m (+0.4% yoy) because of higher sales volume.

In line with revenue, operating expenses was also lower at S$146.1m (-4.4% yoy) because staff cost, facilities expenses, provision for doubtful debts and other general  and administrative expenses declined.

M1’s net profit decreased slightly as revenue fell more than operating expenses.

Profit margin. Because of lower revenue, the net profit margin was lesser at 18.2% in 3Q09 compared to 19.5% in 2Q09. However, the net profit margin of 18.2% in 3Q09 was higher than 17.5% in 3Q08 as a result of lower operating expenses.

Mixed results for market share in 3Q09. The number of post-paid customers rose by 0.8% from 886,000 in 2Q09 to 893,000 in 3Q09. However, its post-paid market share fell from 26.5% in 2Q09 to 26.0% in 3Q09. Furthermore, the number of prepaid customers rose by 5.2% from 783,000 in 2Q09 to 824,000 in 3Q09. This caused its pre-paid market share to improve from 24.5% in 2Q09 to 25.0% in 3Q09. We feel that M1 should continue to work on improving its post-paid market share against bigger rivals SingTel and StarHub through innovative products, advertising and promotion programs as well as attractive discounts.

Outlook for FY2009. M1 highlights that operating conditions remain challenging despite the recovery of the global economy. It mentions that operating revenue remains under pressure. Nevertheless, it anticipates net profit to be comparable to 2008. It will offer iPhone by the end of the year and we expect this to help M1 achieve a larger increase in the number of post-paid customers.

Maintain Hold with fair value at S$1.78. We have a hold recommendation as M1 is likely to achieve limited growth in the local telecommunications market. Using the free cash flow to firm model, we derive a fair value of S$1.78. The dividend yield for the stock is 7.2%.

Disappointing 3Q09

• Maintain NEUTRAL. As we raise our capex assumptions to bring them in line with M1’s latest guidance, our earnings forecasts drop by 0.7-1.5% for FY09-11. Our DCF-based target price, however, rises to S$2.07 (WACC 9.5%, LT growth 1.0%) from S$2.00 as we adopt a lower 10% (11% before) capital-intensity forecast for FY11 onwards. Maintain NEUTRAL as we continue to see a lack of catalysts. This is counterbalanced by M1’s 7% yields, upside from NGNBN and M1’s best exposure to wireless broadband. While management is coy, we believe that capital management will occur in FY10. We raise our DPS forecast for FY10 to 38 cts/share from 14.7 cts/share translating into yields of 20.5% from 7.8% before. This is based on 1.0x net debt/EBITDA which is consistent with past practice.

• In line. 9M09 results were in line at 74% and 73% of our full-year forecast and consensus respectively. While in line, 3Q09 was disappointing on three counts: weaker revenue and margins qoq and higher churns. No dividend was declared, as expected. We have trimmed our earnings forecasts by 0.7-1.5% for FY09-11 as we incorporate higher capex assumptions.

• Topline reversed course. M1’s topline dropped 1.1% qoq in 3Q09 from +2.2% qoq in 2Q09 because of lower postpaid (-1.1% qoq) and IDD (-3.3% qoq) revenue. Postpaid ARPU contracted 1.3% qoq, affected by competitive tariff plans, bundling discounts and lower roaming which also dented IDD revenues. In spite of a gradual economic recovery, M1 expects near-term revenue to remain under pressure as it has yet to see a firm and sustainable rebound in spending.

• Margins suffered a similar fate. EBITDA margins also drifted down by 1.4% pts qoq because of higher handset costs (17.3% of revenue) from higher volumes sold and higher staff costs (9.9% of revenue).

• Guidance mostly intact. M1 left its guidance for stable PAT yoy intact, but raised its capex budget to around S$120m from S$100m because of a faster rollout of its backhaul upgrade.

On track to meet targets

At a Glance

• 3Q09 net profit of S$34.2m in line with our expectations
• Market share steady at 25.6%, recently concluded iPhone deal should enhance competitive status.
• Management upped the FY09F capex guidance to S$120m due to quicker than expected rollout. The backhaul cost savings of over S$10m in FY10F is on schedule.
• BUY for 7% FY10F EPS growth and 7.3% dividend yield.

Comment on Results

3Q09 net profit of S$34.2m, on the back of a 4% y-o-y fall in revenue to S$188m, was in line with our projection of S$35m. Revenues were affected by lower ARPUs (competitive tariffs) in the postpaid segment and bundling discounts on prepaid offerings. However, operating expenses also declined 4.4% owing to lower staff costs and facilities expenses, thus preserving margins.

Operating metrics showed a mixed performance – growth in volume accompanied by lower ARPUs – but mobile market share remained constant at 25.6%. Net new adds totaled 49,000 in 3Q09, largely driven by prepaid acquisitions. However, postpaid and prepaid ARPUs both fell, by 1.3% and 5.2% q-o-q respectively, owing to competitive pricing tactics. Data contribution to revenue continued to improve, growing to 11.9% in 3Q09 from 10.9% in 2Q09.

Outlook & Recommendation

The backhaul network, which is expected to yield cost savings of S$10-15m in FY10, is on schedule and management upped the FY09 capex guidance to S$120m, as work is progressing faster than previously expected. The Qala integration is also on track, as is the work on operational readiness for commercial launch of NGNBN fixed broadband offerings by 2Q-2010.

Dividend yield in excess of 7% look secure, as market share concerns have been further eroded by the recent iPhone deal with Apple.