Forget 2011, Look To 2012

We keep our BUY rating on M1 following the in line 3Q/9MFY11 results released on 17 October. We expect its fixed (fiber) revenue streams to gain momentum in 2012 as the company benefits from the wider footprint of its own NGNBN OpCo allowing for greater wholesale cost savings. The recent introduction of new bundled plans should drive stronger revenue growth through 4QFY11, coinciding with a seasonally stronger quarter and the launch of the new iPhone 4S. We like M1 as it offers arguably the strongest exposure to the NGNBN with share price supported by a sustainable dividend yield of 6-7% (80% payout policy reaffirmed) for FY11/12.

Bottleneck issues should be behind soon. We expect much of the bottleneck issues (largely at the OpenNet level) afflicting the slow take-up of the NGNBN services in Singapore thus far to resolve by end- 2011/1Q2012. M1 indicated at the recent 3QFY11 results call that interest on its entry level fiber plan (Singapore’s cheapest offering at SGD59/mth for 100Mbps) has picked-up with greater awareness in the market. M1 said 40-45% of the 16k fiber customers recorded as at 3QFY11 were added during the quarter, translating into some 7k new additions although it was not able to guide on its share of the market. This contributed to the 77% y-o-y growth (+9% q-o-q) in fixed services revenue for the quarter. It believes there are at least 12k broadband users on cable/ADSL coming out of contracts which presents a good potential catchment. M1 deployed its own NGNBN OpCo in Sept with its geographical footprint widening to 100% by end- 2011 from 50% currently. The company saves up to SGD31 in wholesaling cost per customer by linking its fiber customers across its own OpCo than the government mandated Nucleus Connect.

All is not lost without Vodafone. M1 was not able to quantify the impact from the impending cessation of its 7 year Vodafone global roaming agreement. Management stressed that multiple roaming arrangements in place, including the Asian Mobility Initiative (AMI) through Axiata would still provide a fallback and the decision to not proceed with the renewal will not have a significant impact. We believe all is not lost as the Vodafone agreement entails strict volume commitments that M1 could have found prohibitive given the scale and its roaming traffic profiles, and it would be able to save substantially on fees paid to Vodafone by not renewing the partnership.

Still a BUY- underappreciated. Management has maintained capex guidance of SGD100m for FY11 with 9MFY11 run-rate at 85% (OpCo cost built into 3QFY11). We believe there is lower risk of capex surprising on the upside post FY11 even with the launch of LTE. This portends further capital management opportunity but historical precedence would suggest that M1’s management typically errs on the conservative, taking cue from external economic conditions and developments. Still, we believe the stock’s sustainable 6% dividend yield is an adored attribute in the current economic environment.

Within expectations

•4%y-y increase in profits for the quarter on track to meet our full year estimates

•Lower handset sales due to higher sales of cheaper phones

•Fibre broadband client base reached 16k

•Establishment of OPCO translates OPEX into CAPEX

•Maintain Hold recommendation with target price of S$2.50

3QFY11 in line with our full year estimates

M1 reported 3QFY11 revenue and profits of S$245mn & S$41mn respectively. The key highlight of the quarter is the significant increase in Fixed service revenue due to significant Fibre take up rates during the quarter. The company’s Fibre client base now stands at 16k as of the quarter end. Revenue contribution from handset sales declined 12% due to sales of cheaper phones in the quarter.

Establishment of own OPCO would reduce OPEX into CAPEX

M1 established its own OPCO for the provision of broadband services. By having its own OPCO, M1 would be able to save on connection fees paid to Nucleus Connect of S$21 & S$75 for residential & corporate customers and translates OPEX into CAPEX. The company’s guidance of an initial S$10mn CAPEX for establishing their own OPCO appears very low. Its network roll out had already reached 50% and upon completion of its rollout, 80-90% of M1’s broadband customers would be served by their own OPCO.

M1’s Postpaid ARPU declined sequentially due to early recognition policy

As mentioned earlier in our reports, M1 employs a fair value accounting policy for the sales of its IPhone plans. Consequently, its Postpaid ARPU booked in the quarter continued to decline as part of the contract revenue had been realised earlier upon initial sale. However, underlying postpaid ARPU remained stable at S$63-64/mth. M1 also reported net adds of 7k & 34k postpaid & prepaid mobile customers for the quarter on low churn rates of 1.3%.

Valuation

We value M1 using a DCF method (WACC: 6.6%, terminal g: 0%) to arrive at our target price of S$2.50. We maintain our view that current market price fairly reflects M1’s outlook and recommend that investors Hold the stock for dividend yields of 6%.

M1 posts 4.1% rise in Q3 profit to $41.1m

Lower operating expenses, lower cost of sales lift earnings

M1 Limited’s third-quarter operating revenue dipped 0.4 per cent to $244.8 million, from $245.7 million a year ago, as weaker handset sales weighed on the topline.

However, net profit for the three months ended Sept 30 climbed 4.1 per cent to $41.1 million from $39.5 million in the prior year.

Earnings per share for the quarter rose 2.3 per cent to 4.5 cents, from 4.4 cents a year earlier.

Lower operating expenses, helped by lower cost of sales, were the key driver in the mobile provider’s higher earnings.

Net margin for the quarter increased 0.7 of a percentage point to 16.8 per cent from 16.1 per cent for the corresponding period last year.

Cost of sales fell 4.7 per cent year-on-year to $118.0 million on the back of lower handset costs, whilst a drop in operating expenses was helped by lower advertising and administrative costs and lower general and administrative expenses.

The smallest local operator also turned in a better report card for two of its three business lines in the third quarter.

Notably, revenue from mobile services, which accounts for more than half of the group’s revenue, grew 2.5 per cent to $147.5 million.

Surging 77.0 per cent, sales from M1’s fixed services segment – its nascent broadband business – broke into the double-digit range, raking in a total of $10.8 million in 3Q11 from $6.1 million in 3Q10.

On the downside, M1’s business segment, internal call services, saw a 5.3 per cent dip in revenue to $30.3 million for 3Q11 due to weaker retail takings.

Handset sales for the season was also 11.6 per cent weaker year-on-year at $56.3 million as compared to $63.7 million in 3Q10 on the back of lower unit selling prices.

On a year-to-date basis, M1’s operating revenue for the nine months ended Sept 30, 2011, went up 4.2 per cent at $747.8 million on the back of higher service revenue and handset sales. Net profit for the first nine months also came in 5.7 per cent higher year-on-year at $126.4 million.

Last month, M1 launched its own active network for the Next Generation Nationwide Broadbank Network (NGNBN) in the hope of lowering its operating cost base.

M1 chief executive officer Karen Kooi shared that this latest initiative would boost M1’s overall service level and competitiveness on top of enhancing its ability to offer customised solutions.

‘Based on the current outlook and barring any unforeseen circumstances, net profit after tax for 2011 is likely to improve, compared to 2010,’ said Ms Kooi.

M1 shares closed one cent lower at $2.48 yesterday.

M1 posts 4.1% rise in Q3 profit to $41.1m

Lower operating expenses, lower cost of sales lift earnings

M1 Limited’s third-quarter operating revenue dipped 0.4 per cent to $244.8 million, from $245.7 million a year ago, as weaker handset sales weighed on the topline.

However, net profit for the three months ended Sept 30 climbed 4.1 per cent to $41.1 million from $39.5 million in the prior year.

Earnings per share for the quarter rose 2.3 per cent to 4.5 cents, from 4.4 cents a year earlier.

Lower operating expenses, helped by lower cost of sales, were the key driver in the mobile provider’s higher earnings.

Net margin for the quarter increased 0.7 of a percentage point to 16.8 per cent from 16.1 per cent for the corresponding period last year.

Cost of sales fell 4.7 per cent year-on-year to $118.0 million on the back of lower handset costs, whilst a drop in operating expenses was helped by lower advertising and administrative costs and lower general and administrative expenses.

The smallest local operator also turned in a better report card for two of its three business lines in the third quarter.

Notably, revenue from mobile services, which accounts for more than half of the group’s revenue, grew 2.5 per cent to $147.5 million.

Surging 77.0 per cent, sales from M1’s fixed services segment – its nascent broadband business – broke into the double-digit range, raking in a total of $10.8 million in 3Q11 from $6.1 million in 3Q10.

On the downside, M1’s business segment, internal call services, saw a 5.3 per cent dip in revenue to $30.3 million for 3Q11 due to weaker retail takings.

Handset sales for the season was also 11.6 per cent weaker year-on-year at $56.3 million as compared to $63.7 million in 3Q10 on the back of lower unit selling prices.

On a year-to-date basis, M1’s operating revenue for the nine months ended Sept 30, 2011, went up 4.2 per cent at $747.8 million on the back of higher service revenue and handset sales. Net profit for the first nine months also came in 5.7 per cent higher year-on-year at $126.4 million.

Last month, M1 launched its own active network for the Next Generation Nationwide Broadbank Network (NGNBN) in the hope of lowering its operating cost base.

M1 chief executive officer Karen Kooi shared that this latest initiative would boost M1’s overall service level and competitiveness on top of enhancing its ability to offer customised solutions.

‘Based on the current outlook and barring any unforeseen circumstances, net profit after tax for 2011 is likely to improve, compared to 2010,’ said Ms Kooi.

M1 shares closed one cent lower at $2.48 yesterday.