A Seasonally Weaker Quarter, Roaming Revenues Stay Under Pressure

There were no surprises in M1’s 1QFY13 results, which reflected typical seasonality and the extended weakness in roaming revenue. Management expects margin upside to be capped as subscriber acquisition cost (SAC) will likely remain high. We maintain our core earnings forecasts, which assume a two-year CAGR of 14.5%. Our FV remains at SGD2.70, based on DCF (10% WACC). Maintain NEUTRAL.

Weaker roaming revenue set to persist. We remain concerned over the decline in M1’s roaming revenue – which makes up 12%-15% of its overall mobile revenue – as it is suffering from a growing number of travelers opting for connectivity via Wi-Fi. To mitigate the pressure on traditional roaming revenues, M1 has signed agreements with operators in over 120 countries to provide unlimited Wi-Fi data roaming services.

9% of subs consuming data in excess of bundle. M1 revealed that 20% of its postpaid subscribers are on tiered data plans, with 9% of these subscribers exceeding their data bundle – average revenue per unit (ARPU) uplift of 8%-10%. This suggests that it is only able to monetize 2% of its postpaid base on its LTE plans. Average data consumption on smartphones has exceeded 2GB/month vs 1.6GB/month a year ago.

Flattish fiber subs addition. Although M1 grew its fiber customers to 60k in 1QFY13, subscriber net additions have been relatively flat, at 8k, in the past two quarters. Its share of the fiber additions have also been on a decline, a reflection of the more aggressive acquisition campaigns and bundling promotions by SingTel and StarHub. Management does not see the absence of premium content as a hindrance in growing its fiber business.

Share price playing catch-up. M1’s share price has risen 11.3% YTD, which could indicate a laggard play following its relative underperformance vis-à-vis its peers in 2012. Management has reaffirmed its previous net profit guidance of ‘moderate growth’ and capex guidance of SGD130m-SGD150m for FY13 (excluding 4G spectrum cost). We make no changes to our core earnings forecasts of SGD161m and SGD192m for FY13 and FY14 respectively. NEUTRAL.

A Seasonally Weaker Quarter, Roaming Revenues Stay Under Pressure

There were no surprises in M1’s 1QFY13 results, which reflected typical seasonality and the extended weakness in roaming revenue. Management expects margin upside to be capped as subscriber acquisition cost (SAC) will likely remain high. We maintain our core earnings forecasts, which assume a two-year CAGR of 14.5%. Our FV remains at SGD2.70, based on DCF (10% WACC). Maintain NEUTRAL.

Weaker roaming revenue set to persist. We remain concerned over the decline in M1’s roaming revenue – which makes up 12%-15% of its overall mobile revenue – as it is suffering from a growing number of travelers opting for connectivity via Wi-Fi. To mitigate the pressure on traditional roaming revenues, M1 has signed agreements with operators in over 120 countries to provide unlimited Wi-Fi data roaming services.

9% of subs consuming data in excess of bundle. M1 revealed that 20% of its postpaid subscribers are on tiered data plans, with 9% of these subscribers exceeding their data bundle – average revenue per unit (ARPU) uplift of 8%-10%. This suggests that it is only able to monetize 2% of its postpaid base on its LTE plans. Average data consumption on smartphones has exceeded 2GB/month vs 1.6GB/month a year ago.

Flattish fiber subs addition. Although M1 grew its fiber customers to 60k in 1QFY13, subscriber net additions have been relatively flat, at 8k, in the past two quarters. Its share of the fiber additions have also been on a decline, a reflection of the more aggressive acquisition campaigns and bundling promotions by SingTel and StarHub. Management does not see the absence of premium content as a hindrance in growing its fiber business.

Share price playing catch-up. M1’s share price has risen 11.3% YTD, which could indicate a laggard play following its relative underperformance vis-à-vis its peers in 2012. Management has reaffirmed its previous net profit guidance of ‘moderate growth’ and capex guidance of SGD130m-SGD150m for FY13 (excluding 4G spectrum cost). We make no changes to our core earnings forecasts of SGD161m and SGD192m for FY13 and FY14 respectively. NEUTRAL.

Positive on continued Data monetizing

Company Overview

M1 is the 3rd largest Telecommunications company in Singapore. The introduction of NGNBN in Singapore lowered entry barriers to the Fixed Line business, which would allow M1 to venture into the corporate and retail

broadband market.

• 1.7% y-y increase in Net Income, Service revenue healthy with 4.1% y-y growth
  
• Positive on 11% of re-contracting customers upgrading to higher tiered postpaid plans
  
• Maintain Neutral, with new TP of S$2.58.
  

What is the news?

M1 reported 1.7% y-y increase in Net profits. Similar to the previous quarter, service revenue was positive. Y-y increases in revenue contribution from Mobile telecommunication services and Fixed services were also

registered. International call service revenue was however down on lower roaming and International calling card usage. Expenses remain well managed. Net income was above expectations due to lower cost of services. Management guided for moderate growth in FY2013 net profit after tax.

How do we view this?

We are positive on management’s guidance of further data monetizing. While postpaid customers continue to exceed their data allowances, management also guided that 11% of re-contracting customers have upgraded to higher tiered postpaid plan. We continue to expect further data monetizing, although at a tapered rate due to higher proportion of signups from more cost conscious customers moving forward. Management guides for high capital expenditure requirements in FY2014-FY2015. Coupled with the upcoming spectrum auction, we think that there is limited potential for M1 to increase dividend yield in the near term.

Investment Actions?

We adjust our figures to reflect 1Q13 earnings, and lower cost. We continue to expect M1 to deliver stable net profits moving forward. M1’s dividend yield of 5.0% continues to remain attractive at current prices. However, we expect limited upside capital gains, due to previous share price rally and lower earnings growth. We maintain our “Neutral” rating, with a new TP of S$2.58.

Maximum Warp, Mr Data. Up to BUY

Upgrade to BUY. We recommend a switch to M1 from SingTel and StarHub. Dividend yield of 5% is decent but that is not the main reason to buy the stock. Instead, the relative underperformance of the stock this year vs. peers provides a chance to get in early on potential earnings upside from the adoption of 4G, which we believe will happen faster and sooner than expected in 2013. Already, the early numbers in the 1Q13 results are encouraging. We upgrade M1 to BUY with a DCF-derived target price of SGD3.55, the top end of consensus.

Tiered plan price hike to kick in this year. The SGD3/mth price hike since Sep 2012 when M1 switched from unlimited to tiered plans should have benefit postpaid ARPUs in FY13. M1 now charges SGD39/mth for 2GB of data, up from SGD36/mth for its previous 12GB plan. Previously, it had been the cheapest; now it is on par, befitting its superior 4G coverage. The number of postpaid subscribers that exceeded their data bundles has also doubled QoQ, which is a strong sign of a positive data monetisation trend.

Monetisation should kick in sooner than later. We believe M1 will benefit faster and sooner than expected from the higher data traffic and ARPU uplift that will come from (1) 4G adoption and (2) richer mobile content. In our view, 4G adoption will take place faster than 3G for the obvious reason that nobody can do without their smart devices anymore. Compared to 2009 when 3G first came into the picture, smartphones are now universally available (even 4G) and mobile content is a lot more richer and compelling.

M1 data biz already doing better than peers. M1’s mobile revenue growth has picked up steadily in 2012 on the back of its outperforming non-voice revenue, bucking the downward or flat trend of the other two operators. Given that this has been done without any significant increase in overall market share or ARPU, we believe that this could be due to M1 gaining market share in the 4G base, especially since the steepest jump in mobile revenue occurred in 4Q12, the quarter after it introduced 4G plans.

In-line with expectations. 1Q13 results (NPAT +1.8%/+8.8% YoY/QoQ to SGD41m) showed great promise for 2013 to be a good year. Service revenue rose 4% YoY, the fastest growth since 2010, on the back of good growth in both mobile and fibre businesses. The number of 4G customers on tiered plans jumped from 43k in 4Q12, its launch quarter, to 223k in 1Q13, just about 1% of its total postpaid subscribers but we expect rapid growth ahead in 2013 as M1 has the advantages of full island-wide coverage and a superior network.