Category: M1
M1 – CIMB
Cutting the line with Vodafone
Roaming and corporate lines to cease
We view negatively M1’s decision to end its partnership with Vodafone from 31 Dec 11 as this may shave M1’s core net profit by 5-10%, based on our estimates. M1 has a roaming partnership with Vodafone whereby users of Vodafone or Vodafone partners roam on M1’s network in Singapore. We also gather from the industry that Vodafone provides mobile telephony for multinational companies through M1. We maintain our NEUTRAL rating on M1 although there are risks to our forecasts and DCF-based target price of S$2.63 (WACC 8.5%) as a result of the cessation of the partnership. M1’s share price should be supported by its fairly attractive dividends. SingTel is our top Singapore telco pick.
The news
M1 announced it is ending its 7-year partnership with Vodafone from 31 Dec 11. M1 has a roaming partnership with Vodafone whereby users of Vodafone or Vodafone partners roam on M1’s network in Singapore. M1 still has roaming partnerships via the Axiata group and Asian Mobility Initiative, a regional grouping of networks which includes Celcom (Malaysia), DTAC (Thailand), Idea (India), Smartone (Hong Kong and Macau), Sun Cellular (Philippines), and XL Axiata (Indonesia).
Comments
Negative development. We are negative on this news as we believe roaming revenue from Vodafone and its partners forms a substantial part of M1’s inbound roaming revenue which contributes an estimated 8-10% to its total revenue. Assuming the Vodafone partnership contributes 20-30% to M1’s inbound roaming revenue, ending it could shave about 2-3% and 5-10% off M1’s revenue and core net profit respectively.
Vodafone also supplies business products (such as Blackberry devices and dongles) at lower prices, and provides M1 users preferential roaming arrangements on Vodafone and Vodafone-partner networks. We also gather from the industry that Vodafone provides mobile telephony for multinational companies (MNCs) through M1. We believe MNCs will gradually shift to Vodafone’s new partner network when their contracts expire.
We believe Vodafone will soon ink a new partnership with SingTel or StarHub for roaming and mobile telephony services in Singapore.
Valuation and recommendation
We remain NEUTRAL on M1 thanks to its fairly attractive dividend yield 6-7%. This is despite downside risks to our earnings forecasts and DCF-based target price of S$2.63 as a result of the cessation of the partnership. SingTel is our top Singapore telco pick.
M1 – Phillip
Biggest beneficiary of developments in the industry
• Biggest beneficiary of developments in the industry
• Retail broadband could be the game changer for M1
• Excellent yield play for uncertain times
• Resume coverage with a Hold recommendation and target price of S$2.52.
Biggest beneficiary of developments in the industry
In our view, the biggest beneficiary of developments in the local Telco scene would be M1. Barriers to entry were lowered for the smallest player in Singapore and provides opportunities for the company to transit from a pure mobile player to a full fledge integrated service provider.
Growth in retail broadband to be a game changer for M1
Currently, the retail broadband market had been dominated by SingTel and Starhub. However, Next Generation National Broadband Network (NGNBN) eliminated the infrastructure constraints that deterred M1 from entering this market in the past. In Sep 2009, M1 prepared itself for this new opportunity by acquiring Qala, which allows M1 level up with an existing client base. We see this as a major development for the company as it ventures into the fixed line business.
Expect meaningful gains in retail broadband market
According to statistics published by IDA, Singapore currently has c.1.2mn residential fixed broadband customers. Assuming a typical contract length of 24months, we estimate that on average, 50k broadband customers could be up for renewal every month. Our estimate is higher than the guidance provided by M1 during its 2QFY11’s earnings conference call of 10-12k subscriptions due for renewal in the market.
With an average ARPU estimate of S$45/mth and assuming that M1 captures 20% of contracts up for renewal, the company could add S$1.3mn to its fixed line revenue per quarter. This would lead to retail broadband revenue market share ofS$85mn for M1 by end FY13E, as compared to the current S$400mn for SingTel and S$240mn for Starhub. Being a new entrant to the market, M1 would need to offer very competitive rates in order to quickly gain market share. We believe that the company’s recent promotional offer of S$39/mth for a retail 100Mbps fibre line is marginally profitable at best after deducting the S$21 interconnection charges paid to Nucleus Connect & OpenNet.
TELCOs – OCBC
Decent 2QCY11 scorecard; maintain OVERWEIGHT
Decent 2CY11 showing. All the three telcos – M1, SingTel and StarHub – put in pretty decent showing in their 2QCY results recently, mostly meeting our forecasts, and largely demonstrating the defensive nature of their businesses. Both M1 and StarHub declared an interim and quarterly dividend of S$0.066/share and S$0.05, respectively.
Review of Singapore operations. SingTel continues to dominate the local telecoms market, with a ~46% share in the post-paid mobile market, followed by StarHub with ~28% and M1 ~26%. Collectively, we note that the post-paid subscriber base here grew by around 90k QoQ to 3912k; M1 added 13k, SingTel +57k, and StarHub +20k in the last quarter. And with the bulk of the phones sold continuing to be smartphones, we also see higher contribution from data as a percentage of post-paid ARPU (min of 36% for StarHub to a max of 41% for SingTel), although monthly ARPUs have already stayed largely flat at S$55 for M1, S$87 for SingTel and S$73 for StarHub. The broadband segment was generally quite lackluster for all the three telcos, hampered by the slower than-expected take-up of the new Fiber plans under NBN (National Broadband Network) initiative. The Pay TV segment for both SingTel and StarHub continued to show modest growth as households are increasingly getting used to the idea of having two set-top boxes.
2H11 outlook remains stable. Going forward, all the three telcos expect their Singapore operations to remain stable or show modest growth, buoyed by continued customer additions and increasing mobile data usage; note that StarHub though has nudged its revenue growth to low single-digit from single digit previously. We expect the three telcos’ EBITDA margins to remain around current levels – 42% for M1, 42% for SingTel and 30% for StarHub. Both M1 and SingTel have also kept their earlier capex guidances unchanged; but StarHub has pared its capex from 13% of revenue to 12%. And thanks to their strong cashflow-generative businesses, the telcos have largely kept their dividend payout guidance; M1 to pay at least 80% of underlying net profit; SingTel to pay 55-70% of underlying earnings; StarHub to pay S$0.20/share, or S$0.05/share per quarter.
Overweight on telcos. In light of the increased volatility in the market due to the unresolved uncertainties in Europe, the still floundering economic recovery in the US and potentially slowing economic growth in China, we continue to like the telcos’ defensive earnings and relatively attractive dividend yields. Maintain OVERWEIGHT. While we have BUY ratings on all three telcos, our preference is for M1 as we believe it has potentially the most to gain from the NBN in the coming two years.
TELCOs – DBSV
Sector offers >6% yield, 2Q11 Review
• M1’s higher gearing and weak free cash flow may limit earnings payout to 80%, below last year’s 100%.
• SingTel continues to gain mobile revenue share while StarHub is gaining non-mobile subscribers despite absence of English Premier League rights.
• StarHub is our top pick, trading at 7.4% yield (fixed 20 Scts DPS) versus 6% for M1 & SingTel.
A quick recap of 2Q2011 results. M1 & StarHub reported inline earnings while SingTel’s earnings were 5% below our expectations. SingTel disappointed on lower than expected earnings contribution from Bharti and Optus. Bharti was hit by 3G rollout costs and higher tax rate in India. Optus, on the other hand, witnessed higher mobile competition as smaller player VHA joined market share battle with incumbent Telstra.
StarHub (Buy, TP: S$3.05) is our top pick. StarHub’s free cash flow is likely to be ~120% of FY11F earnings, as the company pays minimal cash tax due to its deferred tax assets. StarHub has a fixed dividend policy of 5 Scts per quarter for FY11F. We believe this will be maintained in the coming years.
StarHub impressed in the non-mobile segment. Despite loss of EPL and ESPN rights, StarHub continued to gain pay TV subscribers with sequentially stable ARPU. Moderate subscriber growth in the broadband segment and stable ARPU also demonstrated solid execution.
M1 (Hold, TP: S$2.60) may not gear up significantly above its peers. At the end of 2Q11, M1 had net debt to annualized EBITDA of 1.1x versus 0.7x for StarHub and SingTel each as shown in the chart on the side. M1’s gearing spiked from borrowing S$81m to partly pay for FY10 dividends, as its free cash flow was very weak. Even FY11F free cash flow may be ~70% of FY11F earnings due to fair value accounting for handsets. In our view, investor should expect 80% earnings payout ratio.
SingTel (Hold, TP: S$3.20) continued to gain mobile revenue share in Singapore. This was driven by more attractive lineup of handsets and devices offered slightly ahead of peers, focus on pushing data SIM cards by bundling them with fixed broadband service and attractive discounts to subscribers on re-contracting. Peers do not emulate these tactics lest market should become more competitive.
M1 – CIMB
Not much to talk about
• Within expectations. Annualised, M1’s 1H11 results are within expectations, at 2% below our forecast and 1% above consensus. M1 declared a 6.6ct DPS for 2Q11, in line with our forecast. Highlights were slower revenue qoq due to lower handset sales and a qoq recovery in margins. We make no changes to our earnings forecasts for FY11-13 or DCF-based target price of S$2.63 (WACC: 8.5%). Maintain NEUTRAL as M1 lacks re-rating catalysts though downside should be limited by its dividend yields of 6-7%.
• Operating trends. 2Q11 revenue dropped 5% qoq due entirely to lower handset sales (-22.4% qoq) from lower sales volume. Revenue rose 10% yoy as 2Q10 was hit by a supply constraint for iPhones which had slowed handset sales. Service revenue, however, increased 2% qoq and 3% yoy, led by postpaid and growing contributions from fixed lines, both driven by an expanding subscriber base. EBITDA margins recovered by 2% pts qoq due primarily to lower handset costs and SACs but dropped 3.3% pts yoy due to higher handset costs from higher volumes.
• Fibre affected by low number of homes reached. M1 disclosed that NGNBN had passed 70% of homes but the number of homes reached was below 40%. The latter was attributed to the difficulty of obtaining access to condos and disagreements over who would bear the cost of pulling in fibre and lower awareness among heartlanders. M1’s fibre customer base doubled in 2Q from 1Q, to an estimated 10K from about 5K in 1Q. About 10k-12k subscribers come off contracts each month and it would take 1-2 years to address the entire base.
• Own OpCo. M1 will be launching its own corporate OpCo in 3Q11 to increase its competitiveness, offer customised solutions and lower its opex. Fixed margins should improve with the scale as it has to bear start-up costs now.
• Guidance kept. M1 has maintained its guidance of PAT growth for 2011. 1H11 growth of 7% yoy is fairly indicative of the full year and it is reasonable to assume the same run rates. We forecast yoy growth of 11% for 2011 PAT. M1 also keeps its 80% payout and would be monitoring the economy, its free cash flow, and gearing before deciding on any capital management.