High Mobile Churn, Slow Fibre Growth

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.

• 5% decline in profits on 2% growth in sales

• Fibre take up remains slow at 7k/qtr

• High mobile churn rate of 1.5%

• Maintain Reduce with TP of S$2.38

What is the news?

M1 reported revenue increase of 2% attributable to growth in Mobile Services revenue & Fixed Services revenue. Growth in Mobile Services revenue was mainly due to a larger customer base, while Fixed Services revenue improved with a gradual increase in broadband subscriber base (Overall: 50k; Fibre: 29k). EBITDA margin on service revenue declined 2.1ppt as the increase in operating costs outpaced the growth in revenue. Postpaid mobile churn of 1.5% in the quarter was at the highest level since 2QFY10.

How do we view this?

The results were largely in line with our expectations. Despite aggressive pricing by M1, the company’s growth in fibre subscriber base remains slow at a run rate of 7k subscribers in a quarter. We believe that M1’s fixed line business would not be able to contribute meaningfully to its bottom line for at least another year.

Investment Actions?

We tweaked our estimates slightly and maintain our Reduce rating on M1.

1Q12 RESULTS AS EXPECTED

•1Q earnings within 2% of forecast

•Maintains FY12 guidance

•Eyes data and fixed services growth

1Q12 results mostly in line

M1 Ltd reported its 1Q12 results last evening, with revenue coming in at S$262.5m, up 1.9% YoY, or around 2.1% shy of our forecast. While total revenue was down 17.2% QoQ, it was mainly due to the 44.8% drop in handset sales; mobile services revenue continued to grow, rising 2.6% YoY and 1.4% QoQ. As a result, net earnings – though down 5.3% YoY, rebounded 7.2% QoQ to S$40.3m, or just 1.7% below our estimate.

Modest margin improvement

As expected, the dip in margins in 4Q11 was largely seasonal (also due to higher-than-expected sale of the new iPhone 4S). In 1Q12, service EBITDA margin recovered to 40.1% from 39.2% in 4Q11, although still lower than 3Q11’s 42.1%. Management believes that once it reaches economies of scale for its fixed services (where it added another 7k new fiber broadband customers), margins should continue to improve. Meanwhile, post-paid acquisition eased slightly to S$363/subscriber from S$423 in 4Q11; but cost could remain elevated given that more subscribers are moving towards smartphones (now 60% of subscribers are smartphone users).

Stable financial guidance for 2012

For 2012, M1 has maintained its previous guidance, expecting stable performance at both top and bottom-line; and also keeps capex guidance of S$110-130m. Management also expects the growth momentum for mobile data and fixed services revenue to continue for the rest of 2012; and believes it is well placed to capture this growth with the completion of its LTE network rollout in 2H12 and also the nationwide coverage and increased awareness of NBN. However, M1 did note that the pace of the NBN rollout is still below its expectation.

Maintain BUY with S$2.81 fair value

While M1 did experience a lower free-cashflow (down 48.5% YoY and 47.6% QoQ) of S$24.1m, it was due to payment made in 1Q12 for stocks delivered in 4Q11. As such, it is likely one-off and will not affect our DCF-based fair value of S$2.81. Maintain BUY.

1Q12 RESULTS AS EXPECTED

•1Q earnings within 2% of forecast

•Maintains FY12 guidance

•Eyes data and fixed services growth

1Q12 results mostly in line

M1 Ltd reported its 1Q12 results last evening, with revenue coming in at S$262.5m, up 1.9% YoY, or around 2.1% shy of our forecast. While total revenue was down 17.2% QoQ, it was mainly due to the 44.8% drop in handset sales; mobile services revenue continued to grow, rising 2.6% YoY and 1.4% QoQ. As a result, net earnings – though down 5.3% YoY, rebounded 7.2% QoQ to S$40.3m, or just 1.7% below our estimate.

Modest margin improvement

As expected, the dip in margins in 4Q11 was largely seasonal (also due to higher-than-expected sale of the new iPhone 4S). In 1Q12, service EBITDA margin recovered to 40.1% from 39.2% in 4Q11, although still lower than 3Q11’s 42.1%. Management believes that once it reaches economies of scale for its fixed services (where it added another 7k new fiber broadband customers), margins should continue to improve. Meanwhile, post-paid acquisition eased slightly to S$363/subscriber from S$423 in 4Q11; but cost could remain elevated given that more subscribers are moving towards smartphones (now 60% of subscribers are smartphone users).

Stable financial guidance for 2012

For 2012, M1 has maintained its previous guidance, expecting stable performance at both top and bottom-line; and also keeps capex guidance of S$110-130m. Management also expects the growth momentum for mobile data and fixed services revenue to continue for the rest of 2012; and believes it is well placed to capture this growth with the completion of its LTE network rollout in 2H12 and also the nationwide coverage and increased awareness of NBN. However, M1 did note that the pace of the NBN rollout is still below its expectation.

Maintain BUY with S$2.81 fair value

While M1 did experience a lower free-cashflow (down 48.5% YoY and 47.6% QoQ) of S$24.1m, it was due to payment made in 1Q12 for stocks delivered in 4Q11. As such, it is likely one-off and will not affect our DCF-based fair value of S$2.81. Maintain BUY.

Higher acquisition costs weigh on M1

Telco's profit down 5.3% in Q1, despite operating revenue rising 1.9%

Higher acquisition costs pushed M1's net profit in the first quarter down by 5.3 per cent over the corresponding period last year, to $40.3 million.

The cost per postpaid customer was $363, compared with $330 a year ago, although this figure tends to vary from quarter to quarter, said the telco.

Higher acquisition costs could be due to a variety of factors, such as the sale of more expensive handsets such as the Apple iPhone, which take longer to break even.

Theoretically, the initial acquisition costs associated with subsidising handsets would eventually translate to longer term revenue from customer contracts.

M1's operating revenue for the first quarter hit $262.5 million, up 1.9 per cent from the same quarter last year.

Last quarter, its net profit was $37.6 million, while revenue went up to $317.1 million.

Its full year 2011 saw net profit rising 4.5 per cent to hit $164.1 million, with revenue up 8.8 per cent to $1.06 billion.

The postpaid segment continued to make a gradual increase as a proportion of M1's overall customer base, at 52 per cent. Postpaid customers contributed 87 per cent of the telco's revenue mix in the first quarter.

Within the postpaid base, smartphones made up 76 per cent of this pool in the fourth quarter, but this figure dropped to 69 per cent in the first quarter.

M1's operating expenses were $211.5 million, and ended the quarter with cash and cash equivalents of $6.9 million.

Karen Kooi, M1 CEO, said during an analyst call that there has been an increase in the proportion of smartphones using mobile data. In the past, this figure was as high as 98 per cent from mobile dongles, but smartphones now use 32 per cent of M1's traffic, she said.

She noted that mobile data and fixed services revenue continued to grow. Mobile data made up 23.1 per cent of service revenue.

Its overall service revenue increased 3.9 per cent to $192 million.

M1 has 202,000 wireless broadband subscribers. Ms Kooi said that there has been a steady migration of customers away from ADSL and cable switching to fibre broadband services.

However, at the close of M1's last financial year, analysts pointed out that delays with the roll-out of the next-generation nationwide broadband network (NBN) are likely to delay M1's hoped-for gratification by providing new services on the fibre optic network.

M1 is also on track to complete its 4G (fourth generation) LTE (long term evolution) network upgrade this year.

The telco has a 25.8 per cent share of the mobile market, according to the Infocomm Development Authority (IDA).

SingTel's latest market share figure stands at almost half the market, at 45.8 per cent. StarHub has the remaining customer base in the country.

The counter closed one cent higher at $2.44 yesterday.

Higher acquisition costs weigh on M1

Telco's profit down 5.3% in Q1, despite operating revenue rising 1.9%

Higher acquisition costs pushed M1's net profit in the first quarter down by 5.3 per cent over the corresponding period last year, to $40.3 million.

The cost per postpaid customer was $363, compared with $330 a year ago, although this figure tends to vary from quarter to quarter, said the telco.

Higher acquisition costs could be due to a variety of factors, such as the sale of more expensive handsets such as the Apple iPhone, which take longer to break even.

Theoretically, the initial acquisition costs associated with subsidising handsets would eventually translate to longer term revenue from customer contracts.

M1's operating revenue for the first quarter hit $262.5 million, up 1.9 per cent from the same quarter last year.

Last quarter, its net profit was $37.6 million, while revenue went up to $317.1 million.

Its full year 2011 saw net profit rising 4.5 per cent to hit $164.1 million, with revenue up 8.8 per cent to $1.06 billion.

The postpaid segment continued to make a gradual increase as a proportion of M1's overall customer base, at 52 per cent. Postpaid customers contributed 87 per cent of the telco's revenue mix in the first quarter.

Within the postpaid base, smartphones made up 76 per cent of this pool in the fourth quarter, but this figure dropped to 69 per cent in the first quarter.

M1's operating expenses were $211.5 million, and ended the quarter with cash and cash equivalents of $6.9 million.

Karen Kooi, M1 CEO, said during an analyst call that there has been an increase in the proportion of smartphones using mobile data. In the past, this figure was as high as 98 per cent from mobile dongles, but smartphones now use 32 per cent of M1's traffic, she said.

She noted that mobile data and fixed services revenue continued to grow. Mobile data made up 23.1 per cent of service revenue.

Its overall service revenue increased 3.9 per cent to $192 million.

M1 has 202,000 wireless broadband subscribers. Ms Kooi said that there has been a steady migration of customers away from ADSL and cable switching to fibre broadband services.

However, at the close of M1's last financial year, analysts pointed out that delays with the roll-out of the next-generation nationwide broadband network (NBN) are likely to delay M1's hoped-for gratification by providing new services on the fibre optic network.

M1 is also on track to complete its 4G (fourth generation) LTE (long term evolution) network upgrade this year.

The telco has a 25.8 per cent share of the mobile market, according to the Infocomm Development Authority (IDA).

SingTel's latest market share figure stands at almost half the market, at 45.8 per cent. StarHub has the remaining customer base in the country.

The counter closed one cent higher at $2.44 yesterday.