Category: M1
M1 – OCBC
SEES QOQ IMPROVEMENT IN 4Q12
- More margin erosion in 3Q12
- Guides for QoQ improvement
- Maintaining our BUY rating and S$2.80 FV
More margin erosion in 3Q12
M1 Ltd reported another set of softer-than-expected set of 3Q12 results yesterday. While revenue of S$254.7m (+4.0% YoY and +9.6% QoQ) was largely in line with our expectations, another sharper-than-expected decline in margins saw net profit falling some 19.5% YoY and 6.0% QoQ to S$33.1m. M1 attributed the reduced profitability to the continued take-up of Android phones (amortized upfront) and also strong demand for other high-end smartphones (Apple iPhone 5 was launched on 25 Sep). For 9M12, revenue inched up 0.2% to S$749.4m, meeting 70.6% of our full-year forecast, while net profit fell 14.1% to S$108.6m, or 69.7% of our FY12 forecast.
Guides for QoQ improvement in 4Q12
Nevertheless, management remains confident that 3Q12 net profit is probably the lowest for this year as it now guides for QoQ improvements in both top and bottom lines. Management believes the strong demand for smartphones will continue to drive top-line performance while the Android subscribers previously acquired in 2Q and 3Q will contribute more positively to its bottom-line. In addition, it expects to see an uplift in ARPU as new subscribers (and those on recontract) are taking up the mid-end smartphone plans in light of the less-generous data bundles. But for the full-year, it has not changed its previous guidance given in 3Q, as it continues to expect the handset subsidies expensed upfront to have an impact on profitability.
Paring FY12 earnings by 2.8%
As such, we are paring our FY12F earnings by another 2.8% to account for the lower margins, even though we are maintaining our revenue forecast. However, we are leaving our dividend forecast of S$0.145/share unchanged, given its ability to generate strong free cashflows, which increased 46.5% in 9M12 to S$169m. Our DCFbased fair value also remains at S$2.80. Maintain BUY.
M1 – Kim Eng
Hold on for the dividend
iPhone effect already factored in. M1 will report its 3Q12 results on 15 Oct. We expect service revenue to be SGD190-191m (flat QoQ) and net profit to fall QoQ to SGD33-34m, with EBITDA margin expected to fall further QoQ. However, margins should rebound in 4Q12 and beyond as the effects of the iPhone 5 wane. With dividends likely to be maintained at 2011 level of SGD0.45 a share, the stock’s yield of 5.5% should limit downside. However, positive catalysts are limited and likely to stay so until late 2013 at least. Maintain HOLD.
Handset subsidies to spike in short term. iPhone 5 was launched on 21 Sep. M1’s accounting allows it to offset part of the handset cost against future revenue. However, it is not a full offset and we do expect margins to be affected. Also, the high-end Galaxy S3 should also have exerted a negative impact on margins, as it was launched only in May 2012 (just 1 month of sales in 2Q12) and unlike iPhone, M1 expenses off subsidies for Android phones immediately.
Expect to see lower margins in 3Q12. Despite falling two percentage points to an unprecedented low of 38% in 2Q12 (mainly due to higher subscriber acquisition and retention costs), we estimate EBITDA margin could have fallen another two percentage points or more QoQ to approximately 36% in 3Q12.
But margins should improve thereafter. Margins may stay depressed in 4Q12 from spillover iPhone effects. However, we should see an improvement in the following quarters as the impact of the more expensive handsets evens out. Generally, Android phones excluding the hugely popular high-end models such as the Galaxy S3, carry lower subsidy costs than the iPhone. In the longer term therefore, the greater popularity of Android handsets should boost margins and earnings due to their lower costs relative to the iPhone.
Earnings depressed but dividends to be maintained. We had downgraded full year earnings following 2Q12 results. However, management has committed to maintaining dividends at 2011 level of SGD0.145 a share, hence M1’s tradionally healthy yields (currently 5.5%) will also remain intact. This should support the stock on the downside despite a lack of fundamental catalysts in the short term.
M1 – Kim Eng
Hold on for the dividend
iPhone effect already factored in. M1 will report its 3Q12 results on 15 Oct. We expect service revenue to be SGD190-191m (flat QoQ) and net profit to fall QoQ to SGD33-34m, with EBITDA margin expected to fall further QoQ. However, margins should rebound in 4Q12 and beyond as the effects of the iPhone 5 wane. With dividends likely to be maintained at 2011 level of SGD0.45 a share, the stock’s yield of 5.5% should limit downside. However, positive catalysts are limited and likely to stay so until late 2013 at least. Maintain HOLD.
Handset subsidies to spike in short term. iPhone 5 was launched on 21 Sep. M1’s accounting allows it to offset part of the handset cost against future revenue. However, it is not a full offset and we do expect margins to be affected. Also, the high-end Galaxy S3 should also have exerted a negative impact on margins, as it was launched only in May 2012 (just 1 month of sales in 2Q12) and unlike iPhone, M1 expenses off subsidies for Android phones immediately.
Expect to see lower margins in 3Q12. Despite falling two percentage points to an unprecedented low of 38% in 2Q12 (mainly due to higher subscriber acquisition and retention costs), we estimate EBITDA margin could have fallen another two percentage points or more QoQ to approximately 36% in 3Q12.
But margins should improve thereafter. Margins may stay depressed in 4Q12 from spillover iPhone effects. However, we should see an improvement in the following quarters as the impact of the more expensive handsets evens out. Generally, Android phones excluding the hugely popular high-end models such as the Galaxy S3, carry lower subsidy costs than the iPhone. In the longer term therefore, the greater popularity of Android handsets should boost margins and earnings due to their lower costs relative to the iPhone.
Earnings depressed but dividends to be maintained. We had downgraded full year earnings following 2Q12 results. However, management has committed to maintaining dividends at 2011 level of SGD0.145 a share, hence M1’s tradionally healthy yields (currently 5.5%) will also remain intact. This should support the stock on the downside despite a lack of fundamental catalysts in the short term.
TELCOs – Kim Eng
iPhone 5 To Dampen Margins in 2H12
Slower 2H ahead. We are maintaining our SELL calls on SingTel and StarHub as we expect them to be hardest hit by the higher subsidies and longer clawback periods of the iPhone 5 in 2H12. However, M1 is likely to see a more muted impact due to its accounting treatment which brings forward part of future revenue to offset the cost of the subsidy. As such, M1 remains a HOLD, and is our top telco pick in Singapore.
iPhone 5 trumps iPhone 4S. Apple’s iPhone 5 started selling around the world last Friday, including Singapore, and demand is much stronger than the 4S model. Apple has reported that pre-orders for iPhone 5 topped 2m units in 24 hours, more than double the amount of pre-orders it took for the iPhone 4S, reflecting strong pent-up demand for this new model. In Singapore, all the telcos sold out online 90 minutes after opening for booking.
Subsidies rise sharply. Based on the telcos’ iPhone 5 plans, they are stretching their subsidies out over a longer period for iPhone 5 compared to the iPhone 4S. At the sweet spot of the two cheapest plans, which have a minimum contract period of 24 months, the telcos will need almost 1.5 months more to recoup their subsidy cost for the iPhone 5 than the iPhone 4S.
Margin impact likely to be worse than iPhone 4S. EBITDA margins are likely to be affected in 3Q12. Based on past trends, we expect a larger impact (3-4ppt) for SingTel and StarHub, but a more muted impact on M1 (1-2ppt) due to its accounting treatment for iPhones where future revenue is brought forward to cover the cost of subsidies. Based on current reported iPhone sales however, we think our existing forecasts are still in the money.
Hopefully, higher data usage can offset higher subsidy. iPhone 5 is an LTE handset, and the faster LTE speeds should drive up data usage as it would be much easier to consume data, particularly when viewing video and using FaceTime for video chats. We are not assuming a significant rampup in data revenue yet because we think there will be a period of adjustment, where telcos need to improve their app and content offerings, and users need to adjust their consumption patterns.
TELCOs – OCBC
IPHONE 5 TO HELP DRIVE LTE
- iPhone 5 to help LTE adoption
- LTE still likely 2013 story at best
- Defensive earnings, attractive yields
Launch of new iPhone 5
Apple has unveiled the latest reiteration of the hotly popular iPhone, which will be available in Singapore from 21 Sep. Besides sporting a slightly larger screen and better resolution, faster processor, improved battery life, the iPhone 5 is 4G LTE-enabled and will work on the 4G (1800MHz) networks being implemented here.
Demand likely strong
As with the previous versions of the iPhone, we expect the demand for the new iPhone 5 to be pretty strong, especially from people still holding the iPhone 4, which is becoming pretty long in the tooth. We also believe that most iPhone 4 subscribers are eligible for a subsidized upgrade, as the 2-year lock-up period should be over by now.
Should help drive LTE adoption
While the strong demand could see near-term pressure on the telcos’ EBITDA margins due to the higher subsidies for the new iPhone (as compared to Android phones), we also expect the smartphone’s popularity to help drive LTE adoption over the medium to longer term. We had earlier identified the lack of LTE-enabled handsets to be a stumbling block to the adoption of LTE.
Gradual recovery in margins
However, with both M1 and StarHub recently announcing their new mobile plans with tiered data pricing, new and re-contracting subscribers will get greatly reduced free data bundles (starting from 2gig compared to 12gig previously). Because of this, we could see subscribers initially reining in their data usage, thus resulting in minimal – if any – ARPU uplift for the telcos. However, we think that this is just a temporary setback, and should see data usage continuing to increase, thus resulting in a gradual recovery in margins.
LTE is still 2013 story at best
While we expect the iPhone 5 to help subscribers make the jump from 3G to 4G LTE, we still opine that LTE is still a 2013 story at best. Nevertheless, we continue to like the overall telco sector for its defensive earnings and attractive dividend yields (backed by strong operating cashflows). Maintain OVERWEIGHT.