Category: M1
M1 – Kim Eng
Nice way to start the new year
Event
• M1 will report its full‐year FY10 results next Wednesday. While we expect the results to be good but not extraordinary, its share price has risen 12% since early last month on dividend expectations and perhaps, market speculation that it may be the next takeover target, as Axiata owns close to 30% stake. But we do not think the Malaysian mobile operator will want to buy the rest of M1 or to sell its stake. Nevertheless, as our target price has been increased to $2.88 (16% upside) upon rolling over to FY11 forecast, we maintain our BUY call.
Our View
• M1 will report FY10 results next Wednesday after the market closes. We expect revenue to grow 10.5% YoY to $239m and earnings to rise 4% YoY but fall 1.5% QoQ on higher year‐end A&P expenses and smartphone subsidies. Also, the final dividend per share of $0.078 is expected to exceed FY09’s $0.072 for a total full‐year DPS of $0.142.
• In the light of recent M&A events, M1 stands out for its significant Malaysian interest. Mobile operator Axiata owns a 29.5% stake, or 265.4m shares, of which 118.5m shares were acquired from former shareholders C&W and PCCW at $2.20 a share and the rest at $1.85‐2.05 between August 2005 and March 2006. Add $0.55 in dividends paid since FY06, Axiata’s average cost could be as low as $1.50.
• However, we think it is unlikely that Axiata would want to take over M1 or to sell its stake. It has been scaling back capex in recent years and has just reduced its net debt/EBITDA to below 1x. Our Axiata analyst also believes buying M1 would eat into its funding for other more important investments. On the flip side, it would be difficult for Axiata to find another investment that can yield more than 10% annually. However, a potential buyer may have to pay as high as $3.54, going by our DCF valuation.
Action & Recommendation
We maintain our BUY call and raise our target price to $2.88 (from $2.63) as we roll over to FY11 valuation target of 15x PER and 5% dividend yield.
TELCOs – OCBC
Little impact from Telecom Code Revision
Revisions to Telecom Competition Code. The Infocomm Development Authority of Singapore (IDA) has made several revisions to the Telecom Competition Code (TCC) with effect from 21 Jan 2011. One of the key changes is a clause that prohibits telecom licensees from “cross-terminating” a consumer’s service agreement for a breach of another service agreement from an affiliated operator; this means that the telco cannot exert undue pressure on consumers to make payment of disputed charges by threatening to terminate other services (unless offered under the same service agreement). Another key addition is that telcos will no longer be allowed to charge consumers after a free trial service has ended unless they obtained express agreement from the consumer. Other changes to TCC aim to further promote competition, which include the ability for the IDA to apply a prohibition against abuse of dominant position to any licensees that it finds to have significant market power although the regulator has yet to classify them as Dominant Licensees.
More protection for consumers. Overall, these revisions are more to safeguard the country’s growing pool of mobile and broadband users. As of Oct 2010, IDA data shows that Singapore has around 7.2m mobile subscribers and boosts of a mobile penetration rate of 142.1%; the nation also has around 7.5m broadband users with a penetration rate of 183.5%. However, we believe that these revisions are unlikely to have a huge impact on the daily operations of the three telcos. For one, telcos have pointed out to the IDA during the two-year feedback process that they only terminate services as a last resort after they have exhausted all other measures to recover their monies. We think that the outlawing of the automatic “opt in” for services after the free trial has ended may result in some operational changes for the telcos; but we believe that offering a free trial is still one of the best ways for telcos to showcase their value-added services and gain new subscribers.
Maintain NEUTRAL. Separately, we note that SingTel has upped its game with its plan to start video game rental service using the new NBN network; as we articulated before, we think that telcos need value-added services to stand out from the crowd. But as it is still early days for the NBN market, given the still-low adoption rate, we do not believe that there will be a significant catalyst for SingTel and the other telcos in the near term. Maintain NEUTRAL.
TELCOs – OCBC
Little impact from Telecom Code Revision
Revisions to Telecom Competition Code. The Infocomm Development Authority of Singapore (IDA) has made several revisions to the Telecom Competition Code (TCC) with effect from 21 Jan 2011. One of the key changes is a clause that prohibits telecom licensees from “cross-terminating” a consumer’s service agreement for a breach of another service agreement from an affiliated operator; this means that the telco cannot exert undue pressure on consumers to make payment of disputed charges by threatening to terminate other services (unless offered under the same service agreement). Another key addition is that telcos will no longer be allowed to charge consumers after a free trial service has ended unless they obtained express agreement from the consumer. Other changes to TCC aim to further promote competition, which include the ability for the IDA to apply a prohibition against abuse of dominant position to any licensees that it finds to have significant market power although the regulator has yet to classify them as Dominant Licensees.
More protection for consumers. Overall, these revisions are more to safeguard the country’s growing pool of mobile and broadband users. As of Oct 2010, IDA data shows that Singapore has around 7.2m mobile subscribers and boosts of a mobile penetration rate of 142.1%; the nation also has around 7.5m broadband users with a penetration rate of 183.5%. However, we believe that these revisions are unlikely to have a huge impact on the daily operations of the three telcos. For one, telcos have pointed out to the IDA during the two-year feedback process that they only terminate services as a last resort after they have exhausted all other measures to recover their monies. We think that the outlawing of the automatic “opt in” for services after the free trial has ended may result in some operational changes for the telcos; but we believe that offering a free trial is still one of the best ways for telcos to showcase their value-added services and gain new subscribers.
Maintain NEUTRAL. Separately, we note that SingTel has upped its game with its plan to start video game rental service using the new NBN network; as we articulated before, we think that telcos need value-added services to stand out from the crowd. But as it is still early days for the NBN market, given the still-low adoption rate, we do not believe that there will be a significant catalyst for SingTel and the other telcos in the near term. Maintain NEUTRAL.
TELCOs – DBSV
Three divergent trends
• Voice, a major two-thirds slice of the mobile business, is rising for M1 but declining for StarHub.
• Non-mobile business offers opportunities for M1 but poses challenges for StarHub.
• M1 may pay more dividends on top of its regular dividend while StarHub’s commitment to regular dividends could be under pressure.
• M1 is our top sector pick. Longer term, we like SingTel for Bharti’s recovery and potential for capital management with 4Q11F results.
Voice minutes declined at StarHub but rose at M1. Despite a much higher data contribution, StarHub’s 9M10 postpaid ARPU was up 1% yoy vs M1’s 5% yoy increase. This can be attributed to more than 16% decline in voice-minutes for StarHub over the last 7 quarters. Clearly, people are spending more time surfing the web than talking over the phone, impacting players with higher voiceminutes. Previously, most StarHub customers subscribed to highend plans with more voice minutes, but are substituting voice with data now. M1’s users, on the other hand, used lower voice minutes in the past and are now upgrading to high-end plans with data in lieu of higher smartphone subsidies. M1’s launch of per second billing in 2009 may have contributed to rising voiceminutes. SingTel’s voice-minutes have been stable.
Non-mobile business is likely to be up for M1 but down for StarHub. We project StarHub’s non-mobile EBITDA (40% of group EBITDA in 2010) to decline by 5%/3% in FY11F/12F due to the entry of new players in the broadband segment and more competition from SingTel, which is aiming to add >80K pay TV subscribers p.a. over the next 3 years. For M1, we project nonmobile EBITDA (2% of group EBITDA in 2010) to grow by 50%/25% in FY11F/12F on the back of its growing SME broadband business via the National Broadband Network.
Capital management potential at M1. M1 pays out only 80% of its earnings in dividends compared to StarHub’s effective payout of over 130% for FY10F. In our view, M1 could raise its regular payout ratio to over 90% or announce a 6%-9% yield in capital management on top of its regular 6% yield. We rule out capital management at StarHub and remain skeptical about the sustainability of its 20 cents DPS. In the longer term, we like SingTel for Bharti’s recovery and potential for capital management with 4Q11F results. A strong Singapore dollar, diluting overseas contribution is the key concern for SingTel in the near term.
TELCOs – DBSV
Three divergent trends
• Voice, a major two-thirds slice of the mobile business, is rising for M1 but declining for StarHub.
• Non-mobile business offers opportunities for M1 but poses challenges for StarHub.
• M1 may pay more dividends on top of its regular dividend while StarHub’s commitment to regular dividends could be under pressure.
• M1 is our top sector pick. Longer term, we like SingTel for Bharti’s recovery and potential for capital management with 4Q11F results.
Voice minutes declined at StarHub but rose at M1. Despite a much higher data contribution, StarHub’s 9M10 postpaid ARPU was up 1% yoy vs M1’s 5% yoy increase. This can be attributed to more than 16% decline in voice-minutes for StarHub over the last 7 quarters. Clearly, people are spending more time surfing the web than talking over the phone, impacting players with higher voiceminutes. Previously, most StarHub customers subscribed to highend plans with more voice minutes, but are substituting voice with data now. M1’s users, on the other hand, used lower voice minutes in the past and are now upgrading to high-end plans with data in lieu of higher smartphone subsidies. M1’s launch of per second billing in 2009 may have contributed to rising voiceminutes. SingTel’s voice-minutes have been stable.
Non-mobile business is likely to be up for M1 but down for StarHub. We project StarHub’s non-mobile EBITDA (40% of group EBITDA in 2010) to decline by 5%/3% in FY11F/12F due to the entry of new players in the broadband segment and more competition from SingTel, which is aiming to add >80K pay TV subscribers p.a. over the next 3 years. For M1, we project nonmobile EBITDA (2% of group EBITDA in 2010) to grow by 50%/25% in FY11F/12F on the back of its growing SME broadband business via the National Broadband Network.
Capital management potential at M1. M1 pays out only 80% of its earnings in dividends compared to StarHub’s effective payout of over 130% for FY10F. In our view, M1 could raise its regular payout ratio to over 90% or announce a 6%-9% yield in capital management on top of its regular 6% yield. We rule out capital management at StarHub and remain skeptical about the sustainability of its 20 cents DPS. In the longer term, we like SingTel for Bharti’s recovery and potential for capital management with 4Q11F results. A strong Singapore dollar, diluting overseas contribution is the key concern for SingTel in the near term.