Interims in line with expectations

• M1’s interim results were in line with our expectations. We maintain our forecasts, as well as HOLD rating on fair value of $2.29.

• Total mobile subscribers grew a healthy 11% YoY to 1.85 million. Prepaid net adds at 11,000/month were stronger in 2QFY10, while that for postpaid maintained at 7,000/month. Prepaid made up 48% of total subscriber base.

• However, mobile service revenues grew a modest 2% YoY to $288.1 mil in 1HFY10 as ARPUs declined in 2Q. Prepaid fell 6% oY to $14.50, while that for postpaid fell 2% YoY to

$59.70.

• Mobile data continues as a key revenue driver, increasing its contribution to 17.8% of mobile service revenues in 2QFY10, from 11.5% in FY09. M1 continues to upgrade its network to achieve 42 Mbps.

• M1’s maiden launch of iPhones in December 2009 led handset sales to surge more-thantwofold in 1HFY10 to $108mil.

• M1’s new fixed line business which consolidated the acquisition of Qala Singapore (renamed M1 Connect) from 4QFY09, maintained business momentum but still accounts for a mere 3% of total service revenues of $364mil in 1HFY10.

• The launch of the new fibre Next Generation National Broadband Network is now delayed to September/October 2010.

• Total operating expense jumped 31% to $373mil in 1HFY10, but this was largely due to revenue-related costs such as handset subsidies.

• On balance, pretax rose a healthy 9% YoY to $97mil in 1HFY10, but net showed a mere 1% rise to $80mil, masked by the effect of a tax credit in 1QFY09.

• Management maintains a cautious outlook amidst a depressed global macro-backdrop, but guides for bottomline growth for FY10. We maintain our 4% YoY net profit growth to $157mil.

• Dividend yield at 6% – 7% p.a. is now less compelling, after share price appreciation of 88% over the past 20 months since its low.

Focused on market share gains

• Net profit of S$40.8m (+10% yoy) and interim dividend of 6.3 Scents in line. Market share gains for the fifth consecutive quarter.

• FY10F revised up 4%, no change to FY11F, adjusting for fair value accounting (FVA)

• FY10F capex guidance lowered to S$100m from S$100m-120m. Due to FVA, we switch from PER to DCF based (WACC 8.4%, terminal growth 0%) TP of S$2.30.

Fifth consecutive quarter of mobile market share gain. M1’s overall mobile market share continued to inch up and reached 26.2% in 2Q10 (26% in 1Q10) from the low of 25.2% in 1Q10. Post-paid mobile share has been stable at 26.5% while pre-paid share increased to 26% from 23.7% in 1Q10. We estimate operators take longer time (5-6 months compared to 3-4 months earlier) to breakeven on the acquisition costs of new iPhone subscribers. However, Net Present Value (NPV) over 2-year contract period is higher for iPhone subscribers. With 7% yield plus capital management potential intact, we believe M1 is an attractive investment.

Fair value accounting for handsets, supports stable dividends. Under FVA, M1 expenses the handset costs during the period they are incurred. However, a part of the future service revenue over the contract period, attributable directly to the handset is recognized upfront as handset revenue. While FVA results in timing mismatch between earnings and operating cash flow, it does indicate the real profitability of subscribers on a quarterly basis. M1 is using FVA so as to prevent large swings in its earnings, which has implications for its dividends. With higher FY10F earnings, 80% dividend payout ratio should lead to higher dividends, as free cash flow should still exceed 80% of net profit. We expect FY11F earnings to still grow in FY11F, although not as much as without FVA policy.

Keeping our faith in capital management

• In line; upgrade to Outperform. 1H10 core profit met our forecast and consensus, forming 49% and 51% of the respective FY10 numbers. An interim dividend of 6.3 cts was declared for 2Q10, representing a payout of 71%, in line with our forecast. 2Q10 revenue fell qoq following a strong 1Q led by iPhone sales, but margins improved as handset subsidies abated with lower handset volume. We leave our FY10-FY12 forecasts intact but cut our special DPS expectations from 23.5 cts/share to 10 cts/share due to higher working capital requirements from an increased stock of higher-value smartphones. We assume capex will be funded by borrowings, freeing up cashflows for special dividends. This also lowers our DCFbased target price (WACC: 8.5%) to S$2.20 from S$2.26. Despite this, we upgrade M1 from Neutral to Outperform given our strategists’ more cautious view on the market, M1’s defensive qualities and likely capital reduction/special dividend of 10 cts/share, and a beneficiary of soaring inbound visitors.

• Drop in revenue… 1H10 topline declined 10% qoq primarily because of lower handset sales as take-up of iPhones slowed owing to a lack of stock and as consumers waited for iPhone 4. Service revenue was flat as lower IDD revenue (from lower wholesale revenue) and prepaid revenue was offset by stronger postpaid revenue from a larger subscriber base and higher usage. Postpaid net adds were strong owing to good take-up of iPhones in Apr-May and participation in IT shows while prepaid net adds rose as more promotions were rolled out.

• …and costs. EBITDA margins jumped 4.7% pts qoq as handset costs fell (-36% qoq) on lower volumes sold. Other operating costs were stable qoq as lower leased line costs (-12.2% qoq) from more migration to its own backhaul transmission network were offset by higher traffic costs and wholesale costs for fixed services.

• Capital management ruled out for now. M1 also declined to provide a timeline for this. Despite acknowledging its capacity to return more cash and noting the revision in the government’s GDP growth forecast to 13-15% from 7-9% for 2010, M1 is still cautious over the economy. It would, however, re-visit this issue next quarter. We still believe it would pay a special dividend as its net debt/annualised EBITDA of 0.9x is below its limit of 1.5x and the economy continues to recover.

M1 lifts Q2 net profit 10% to $40.8m

Telco’s customer base, operating revenue up; declares higher dividend

THE second-quarter corporate earnings season got off to a good start yesterday, with M1 reporting that its Q2 net profit rose 10 per cent to $40.8 million from a year earlier, as operating revenue improved and its customer base grew.

The telco also raised its dividend slightly, signalling confidence in the business outlook for the rest of the year – a welcome start to the current Singapore corporate earnings season.

M1’s board declared an interim cash dividend of 6.3 cents a share, to be paid in August, up from 6.2 cents a year back.

Its earnings per share rose to 4.5 cents, from 4.1 cents a year earlier.

Compared with Q1, net profit was 3.7 per cent higher, mainly due to lower operating expenses, M1 said after trading ended yesterday. For the first six months of the year, net profit increased to $80.1 million, up 1.5 per cent from the same period last year – or 9.2 per cent if a tax credit adjustment that boosted earnings in the earlier period was excluded.

M1 chief executive Karen Kooi repeated the company’s guidance in April that it expects net profit for the full year to be higher than last year’s.

‘Based on the current outlook, net profit after tax for the year 2010 is likely to improve, compared to 2009,’ she said in a statement yesterday. M1’s share price ended 0.5 per cent higher at $2.16, before its earnings report.

M1 added 180,000 mobile-phone customers over the year, raising its user base 10.8 per cent to 1.849 million at end-June. Its market share at end-May – based on the latest industry statistics – was 26.2 per cent, up from 25.6 per cent at end-June last year.

Mobile services, which account for more than half of the telco’s operating revenue, rose 2.2 per cent over the year to $144.7 million in Q2. Sales to post-paid and pre-paid subscribers grew as M1 acquired more customers, but average revenue per user fell.

Handset sales rose sharply to $40.7 million in the three months to end-June, from $15.6 million a year earlier. Overall, operating revenue for the quarter rose 17.1 per cent year on year to $223.1 million.

M1 is preparing to take full advantage of the commercial opportunities presented by the new nationwide all-fibre network scheduled for launch later this year that will ‘change the current competitive landscape for fixed services’, Ms Kooi said.

Fixed-line services make up just a fraction of M1’s revenue at present – $6.1 million of the company’s $223.1 million in operating revenue in Q2 – but that contribution is likely to rise with the commercial launch of new fibre-optic broadband highway.

This will allow M1 – the smallest of Singapore’s three telcos – to offer fixed-line broadband services to compete with rivals SingTel and StarHub.

M1 Limited announced on Thursday that its net profit for the second quarter ended June 30, 2010 was up 10 per cent from a year ago, at S$40.8 million, fuelling the telco's optimism that FY2010 net profit will be better than FY2009.

'Based on the current outlook, net profit after tax for the year 2010 is likely toimprove, compared to 2009,' said Karen Kooi, M1's chief executive officer,

The improved bottomline was due to higher service revenue.

Operating revenue for the second quarter was up 17 per cent year-on-year atS$223.1 million.

M1's total customer base was 1.849 million as at 30 June 2010. For 2Q10, M1 added 53,000 customers, of which 21,000 were postpaid customers and 32,000 were prepaid customers.

Non-voice services contributed 30.8% of service revenue, up from 25.1% a year ago, driven by growth in the mobile broadband and smartphone customer base.

M1's board has declared an interim dividend of 6.3 cents per share, up from 6.2 cents a share a year ago.