M1 draws first blood in next-gen battle with roll-out of LTE service

SINGAPORE’S smallest operator M1 has pipped its two larger rivals in the race to secure higher mobile surfing speeds by being the first to introduce fourth- generation cellular services in Singapore.

The firm yesterday launched an ultra high- speed mobile broadband service over its newly minted LTE (long-term evolution) network in selected parts of Singapore.

For a start, M1’s LTE infrastructure covers major areas in and around Singapore’s financial district.

These include Tanjong Pagar, Shenton Way, Chinatown, Beach Road, Suntec City, and the Padang.

In addition, the network is also available in the Marina Bay area as well as Tanjong Rhu, according to an M1 statement.

‘Coverage is being progressively expanded and is scheduled to be nationwide by the first quarter of 2012,’ it added.

LTE is widely seen as the successor to the third- generation (3G) mobile networks that are in use today.

Its implementation would allow operators to offer blazing cellular data speeds that are more than a hundred times faster than existing 3G technologies.

M1’s new LTE network will initially boast download speeds of 75 Mbps (megabits per second), a four-fold improvement over the fastest mobile broadband plan being offered today.

By the end of next year, LTE download speeds will be doubled to 150 Mbps.

The network’s upload speeds will correspondingly be boosted from 37.5 Mbps currently to 75 Mbps, M1 said.

The company will initially offer its new LTE service to enterprise customers who are already on its mobile broadband plans.

For a monthly fee of $59.40, these subscribers will get a token-like USB modem to enjoy speedier surfing on their laptops within the areas of coverage.

More LTE-compliant devices such as tablets and smart phones are expected to be available later this year.

Singapore Telecommunications and StarHub will both roll out their LTE networks later this year.

To accommodate the upgrade, the Infocomm Development Authority of Singapore has already set aside two mobile frequency spectrums – the 2.3 and 2.5 GHz (gigahertz) band and the 900 and 1800 MHz (megahertz) band – for operators to boost their cellular bandwidth.

M1 draws first blood in next-gen battle with roll-out of LTE service

SINGAPORE’S smallest operator M1 has pipped its two larger rivals in the race to secure higher mobile surfing speeds by being the first to introduce fourth- generation cellular services in Singapore.

The firm yesterday launched an ultra high- speed mobile broadband service over its newly minted LTE (long-term evolution) network in selected parts of Singapore.

For a start, M1’s LTE infrastructure covers major areas in and around Singapore’s financial district.

These include Tanjong Pagar, Shenton Way, Chinatown, Beach Road, Suntec City, and the Padang.

In addition, the network is also available in the Marina Bay area as well as Tanjong Rhu, according to an M1 statement.

‘Coverage is being progressively expanded and is scheduled to be nationwide by the first quarter of 2012,’ it added.

LTE is widely seen as the successor to the third- generation (3G) mobile networks that are in use today.

Its implementation would allow operators to offer blazing cellular data speeds that are more than a hundred times faster than existing 3G technologies.

M1’s new LTE network will initially boast download speeds of 75 Mbps (megabits per second), a four-fold improvement over the fastest mobile broadband plan being offered today.

By the end of next year, LTE download speeds will be doubled to 150 Mbps.

The network’s upload speeds will correspondingly be boosted from 37.5 Mbps currently to 75 Mbps, M1 said.

The company will initially offer its new LTE service to enterprise customers who are already on its mobile broadband plans.

For a monthly fee of $59.40, these subscribers will get a token-like USB modem to enjoy speedier surfing on their laptops within the areas of coverage.

More LTE-compliant devices such as tablets and smart phones are expected to be available later this year.

Singapore Telecommunications and StarHub will both roll out their LTE networks later this year.

To accommodate the upgrade, the Infocomm Development Authority of Singapore has already set aside two mobile frequency spectrums – the 2.3 and 2.5 GHz (gigahertz) band and the 900 and 1800 MHz (megahertz) band – for operators to boost their cellular bandwidth.

Stay close to home

Event

• By now, it should be clear that the “sell in May and go away” cliché has taken strong hold of the market as the last reporting season saw no upgrades, whether in terms of forecasts or recommendations. If anything, most companies flagged rising costs this year as the biggest stumbling block to growth. In such times, we believe investors should stick close to defensive stocks such as M1. A 100% dividend payout will translate to a

highly attractive yield of 7%. BUY.

Our View

• For FY11, we think M1 will have the added catalyst of a possible dividend encore. Last year, the company paid out 100% of its earnings, adding a special dividend of 3.5 cents a share on top of the ordinary dividend of 7.7 cents a share. Looking at its capex trends, we think there is the possibility of a similar payout this year. We upgrade our dividend forecast for FY11 from 14.5 cents a share to 18 cents a share, assuming a 100% payout ratio against the typical 80%.

• M1’s Long Term Evolution (LTE) network, which is Singapore’s first 4G highspeed (300Mbps) wireless network, will be fully deployed by 1Q12. While a major item, it has always been part of the company’s upgrading plans. Therefore, we do not expect this year’s capex to stray beyond management’s guidance of $100m. With just $12m capex in 1Q11, the trend for the rest of the year should stay similarly tame. This should

enhance M1’s ability to pay more dividends.

• Unlike previous years when subscriber acquisition subsidies shot up due to Apple’s new iPhones, such costs should not be a concern this year with the proliferation of non‐Apple products. Although costs are likely to rise in 2H11 as M1 ramps up its NGNBN‐related sales activities, most of them will be variable in nature. In fact, as it cuts more traffic to its own backhaul transmission network this year, higher sales costs should be mitigated by lower leased circuit costs.

Action & Recommendation

Maintain BUY with a target price of $2.88, based on 16x FY11F earnings.

Stay close to home

Event

• By now, it should be clear that the “sell in May and go away” cliché has taken strong hold of the market as the last reporting season saw no upgrades, whether in terms of forecasts or recommendations. If anything, most companies flagged rising costs this year as the biggest stumbling block to growth. In such times, we believe investors should stick close to defensive stocks such as M1. A 100% dividend payout will translate to a

highly attractive yield of 7%. BUY.

Our View

• For FY11, we think M1 will have the added catalyst of a possible dividend encore. Last year, the company paid out 100% of its earnings, adding a special dividend of 3.5 cents a share on top of the ordinary dividend of 7.7 cents a share. Looking at its capex trends, we think there is the possibility of a similar payout this year. We upgrade our dividend forecast for FY11 from 14.5 cents a share to 18 cents a share, assuming a 100% payout ratio against the typical 80%.

• M1’s Long Term Evolution (LTE) network, which is Singapore’s first 4G highspeed (300Mbps) wireless network, will be fully deployed by 1Q12. While a major item, it has always been part of the company’s upgrading plans. Therefore, we do not expect this year’s capex to stray beyond management’s guidance of $100m. With just $12m capex in 1Q11, the trend for the rest of the year should stay similarly tame. This should

enhance M1’s ability to pay more dividends.

• Unlike previous years when subscriber acquisition subsidies shot up due to Apple’s new iPhones, such costs should not be a concern this year with the proliferation of non‐Apple products. Although costs are likely to rise in 2H11 as M1 ramps up its NGNBN‐related sales activities, most of them will be variable in nature. In fact, as it cuts more traffic to its own backhaul transmission network this year, higher sales costs should be mitigated by lower leased circuit costs.

Action & Recommendation

Maintain BUY with a target price of $2.88, based on 16x FY11F earnings.

Deployment of LTE by 1Q12

Deployment of LTE by 1Q12. M1 Ltd recently announced that it will deploy South East Asia’s first commercial LTE (Long Term Evolution) network in Singapore by 1Q12. M1 has awarded a five-year contract valued at S$280m to Huawei – a leading provider for next-generation telecommunications network solutions for global mobile operators – to provide turnkey LTE solution; this includes installation of macro base stations, distributed base stations and Evolved Packet Core (EPC), for M1’s island-wide next-generation network.

Investing for the future. LTE is capable of delivering downlink speed of up to 300Mbps (versus the current HSPA network which supports 21Mbps) and is specially designed for the efficient carriage of data traffic. We view this development positively, as the demand for mobile data transmission will only continue to grow, fueled by the proliferation of smart devices (phones, tablets and other personal entertainment devices) and also the “stickiness” of new social media. Hence, the network will enable rich multi-media applications such as video conferencing, high-definition content transmission, highspeed video downloads and social network updates.

Timely due to shifting preferences. Recall that M1 had previously paid S$21.7m to secure a lot of the 1800 MHz spectrum, which we understand could also be used for LTE. We view these recent developments as timely due to shifting preferences. As mentioned earlier, we have observed a growing preference towards using instant messaging (via the generous data plans currently) to communicate versus voice – the traditional money churner for the mobile operators. For M1, we note that the post-paid monthly MOU (minutes of usage) has eased to 356 minutes in 1Q11 (down from 364 minutes in 4Q10), while post-paid monthly ARPU has dipped to S$56.1 in 1Q11 from S$58.5 in 4Q10 and S$59.7 in 1Q10. But once the next-gen network is in place, we believe that M1 should be able to offer differentiated services and capture these changing preferences; of course, this is assuming that there are available “4G” devices that can fully utilize the LTE network.

No additional capex needed. In any case, we understand that this LTE move has always been part of M1’s upgrading plans, and hence we do not expect M1 to incur any extra capex this year (or even the next) i.e. capex spending should remain around S$100m, implying no impact on its ability to pay out 70% of its recurring earnings as dividends. As before, we continue to like M1 for its defensive earnings and good dividend yield, hence we maintain BUY with a DCF-based fair value of S$2.79.