Full Year Results

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.

• Profits missed, despite 4.5% growth

• Higher handset sales contributed to strong top line

• Consensus expectations could be too high

• Downgrade to Reduce with revised TP of S$2.36

What is the news?

M1 reported a decent set of results for FY11. Revenue increased by 8.8%y-y, mainly due to strong growth in handset sales. Management attributed the strong handset sales to an increase in sales volume and unit selling price. International calling service revenue declined by 3%, despite a 22% increase in international retail minutes recorded. The company also announced a final dividend of 7.9cents, translating to a full year payout ratio of 80%.

How do we view this?

The results were marginally below our expectations of S$170mn. M1 uses a fair value accounting method to record the sales of its iPhones that partly contributed to the strong top line recorded for its handset sales. Despite higher value smartphone plans sold, postpaid ARPU was only stable sequentially and declined by 1.6% y-y in 4QFY11. We view that as a reflection of the inability to monetize mobile service revenue, in spite of high subsidy on the more expensive smart phones.

Investment Actions?

In our earlier report, we caution that M1’s pricey valuations are a reflection of high expectations of the company’s prospects. While we expect M1 to benefit from the structural shift in market structure with the introduction of NGNBN, we believe that the stock price could face near term headwinds from margin pressure and unexciting management guidance of prospects for next year. After revising our earnings estimates, we downgrade our recommendation on M1 to Reduce.

EXPECTING MORE OF THE SAME IN 2012

•FY11 earnings are in line

•Margin erosion likely seasonal

•Guides for stable FY12

FY11 results mostly in line

M1 Ltd reported FY11 results, which came in mostly in line; revenue grew 8.8% to S$1064.9m, or around 4% ahead of our estimate, boosted by slightly stronger-than-expected handset sales (M1 revealed that it sold a good number of Apple iPhone 4S without contracts). Net earnings came in at around S$164.1m, or just 0.5% shy of our forecast. And as expected, M1 declared a final dividend of S$0.079 per share, bringing the total dividend to S$0.145, or 80% of core earnings as guided.

Margin erosion likely seasonal

While its service EBITDA margin was steady at 39.2% in 4Q11 (41.4% in 4Q10, 42.1% in 3Q11), we note that its overall EBITDA margin slipped to 23.3% (29.6% and 32.4% over the same period). M1 explained that it was due to the strong demand for the new iPhone 4S and seasonal promotion for other smartphones. This also caused acquisition cost to shoot up to S$423/post-paid user (S$368 in 4Q10). However, management expects the cost to start easing in the coming quarters. Post-paid (adjusted) ARPU was stable at S$53 in 4Q11 versus S$53.9 in 3Q11. Data ARPU rose slightly to S$23.1 from S$22.2 in 3Q11; and this could improve further as M1 is looking at new strategies to re-price its data plans using LTE.

Stable financial guidance for 2012

For 2012, M1 expects to maintain stable performance at both top and bottom-line, citing the more uncertain global economic outlook and its potential impact on roaming revenue. It has also kept its 80% dividend payout ratio and expects to spend some S$110-130m in capex. To account for its outlook and results, we are bumping up our FY12 revenue forecast by 4% but are lowering our earnings forecast by 4%. But due to likely lower working capital requirements and capex expenditure in the near future, our DCF-based fair value inches up from S$2.79 to S$2.81. We continue to like M1 for its defensive earnings and greater NBN potential – maintain BUY.

M1’s Q4 profit inches up 0.4%

Operating expenses eat into strong sales; final dividend of 7.9 cents

M1’s net profit edged up 0.4 per cent to $37.6 million for its fourth quarter ended Dec 31, 2011, while revenue surged 21.3 per cent to $317.1 million.

For the full financial year, net profit rose 4.5 per cent to $164.1 million. Revenue for the same period increased 8.8 per cent to $1.06 billion from $979.2 million.

M1 has proposed a final dividend of 7.9 cents per share. Including the interim dividend, the total dividend was 14.5 cents per share, representing an 80 per cent payout of net profit.

Earnings per share for the quarter and full year were 4.1 cents and 18.1 cents respectively, compared with 4.2 cents and 17.5 cents in the year-earlier period.

Though Q4 revenue was driven up by higher service and handset sales, the bottomline only rose slightly because of higher operating expenses, which increased 26 per cent over the year to $272.7 million.

Q4’s higher expenses were partly due to higher acquisition cost per post-paid customer, which shot up to $423 after hovering below the $300 mark in the two preceding quarters. This was attributed to the high demand for the iPhone 4S that was launched in the quarter.

For the full year, however, customer acquisition cost fell 2.6 per cent to $342.

Smartphone users make up about 67 per cent of M1’s total post-paid customer base.

In 2011, M1 added 45,000 new post-paid mobile subscribers, bringing the total to 1.05 million. Including prepaid customers, M1’s total mobile customer base for the year was 2.02 million, an increase of 104,000 subscribers.

M1, which was the first to introduce specific price segmentation based on usage of 3G mobile data plans last year, will reinforce the same pricing principle with the Long Term Evolution (or 4G) data bundles by repackaging them according to customer usage.

‘We believe it’s fairer to our customers to make them pay for what they use so that the experience of the majority is not impacted by the minority who hog the bandwidth,’ said M1 CEO Karen Kooi.

Last month, SingTel revealed that 11 per cent of dongle and tablet users take up 60 per cent of data traffic, a consumption pattern made possible by generous 3G data caps.

Ms Kooi said the data usage pattern that M1 has seen is ‘similar’ to its competitors’.

’10-15 per cent of our base are hogging the bandwidth. With the revised pricing, we hope to rebalance that,’ she said.

Even as the telco moves to further monetise data, the uncertain economic outlook for the year might have an impact on roaming revenue, especially if travel is curtailed, Ms Kooi said.

‘What we are seeing is the trend of people, instead of roaming with their mobile phone, they … buy a local prepaid card for either voice or data. Sales of our prepaid cards at our airport outlet grew by some 200 per cent over last year. Whether or not this trend is going to continue, we are watching it very closely,’ Ms Kooi said.

The telco said it expects a ‘stable performance’ for 2012.

M1 shares closed one cent higher at $2.56 yesterday before its earnings were released.