Category: M1
M1 – CS
1Q FY10 preview: higher sales; marginally lower EBITDA
• M1 will report its 1Q FY10 results after the market closes on Friday this week. We are looking for 1Q FY10 revenue to grow 16% YoY to S$216.2 mn, driven mainly by higher handset sales and fixed network revenues. We expect the arrival of compelling smartphone models, including the iPhone, to drive handset sales.
• However, higher handset sales could drive margins lower for the quarter. At the EBITDA level, we are looking for a 1% YoY decline in 1Q earnings to S$76 mn.
• During the FY09 results briefing, management mentioned that it would review its capital structure once refinancing of the S$250 mn loan was completed. The completion of the refinancing exercise late last month should pave way for a capital structure review – potentially a higher/special dividend payout. We look forward to management's guidance on any capital structure review at the post-results conference call this Friday.
• We maintain our OUTPERFORM rating on M1 with a target price S$2.60. This represents 24% upside from current levels.
M1 – DB
Maintain cautious stance and Hold rating with new S$2 TP
New S$2 TP on fixed-line upside but still cautious on fundamentals, Hold
We include potential fixed-line upside into our M1 estimates, which raises our TP 25% to S$2. But M1’s fundamental outlook remains challenging and we caution against excessive optimism that the National Broadband Network will significantly alter M1’s competitive positioning or growth profile. M1’s late entry into a mature fixed-line market entails substantial execution risks while near-term margins are under pressure. M1 remains our least preferred Singapore telco. But the potential for capital return should provide near-term price support, hence maintain Hold.
Late-entry into fixed-line market presents significant execution risks
M1 is likely to face an uphill task in gaining significant scale as a late entrant into a mature fixed market. With limited service differentiation, it is difficult to see how M1 can encourage significant subscriber churn from STel and STH, unless it is willing to sacrifice margins by competing aggressively on price (a strategy management has indicated to us they will not pursue). We are cautious of substantial NBN execution risks and are not particularly convinced it will significantly improve M1’s competitive positioning and growth profile. Furthermore, the growing emphasis on fixed-line could become an increasing management distraction and impact M1’s performance elsewhere.
Revenue estimates raised but margins now assumed to compress harder
With the impending NBN launch, we now include estimates for M1’s fixed-line business into our forecasts. This raises our FY10e-12e revenue projections 8-19%. But we assume greater margin compression than previously assumed (on costs of developing fixed-line services and expected increase in NBN-driven competition) and project FY10e EBITDA margin to fall 1.5% pt YoY, causing net profit to flat-line (in-line with management guidance). Our FY10e-12e forecasts are 2-11% below Consensus estimates, largely due to our lower margin expectations.
DCF-derived TP; key risks include competition and fixed-line execution
Our TP is raised to S$2 (+25%), primarily reflecting the potential upside from M1’s fixed-line business (which we now include in our estimates). Our TP implies 12.2x FY10 PE. We value M1 using DCF analysis based on 7.2% WACC and 0% terminal growth rate reflecting the long-term ex-growth nature of Singapore’s telco market. Key risks include competition, fixed-line execution and capex
TELCOs – CIMB
1Q10 results preview
• Maintain UNDERWEIGHT. We maintain our UNDERWEIGHT stance as we do not expect any positive surprises in the upcoming 1Q10 results. We also remain concerned given the rise in content cost in the short-term, the pressure on broadband ARPUs and escalating subsidies from strong smartphone take-up. Our top pick in the sector remains M1 (TB, TP: S$2.26) as it would have the most capacity for capital management, the biggest upside from NGNBN and the most to gain from the recent content carry regulation. We retain our UNDERPERFORM recommendation on SingTel (TP: S$3.30) and StarHub (TP: S$2.14).
• No real shocks in 1Q. Competition stayed fairly benign across the major product groups, in our view. While 1Q service revenue typically declines, we believe that 1Q10 service revenue was flattish due to the improving economy, which powered higher usage and roaming, coupled with the increasing take-up of wireless broadband. However, we believe that overall revenue would have grown on the back of a full quarter’s worth of iPhone sales. EBITDA margins should fall, in our view, due to iPhone subsidies, especially for StarHub and M1.
• Expectations for operators. We estimate M1’s revenue rose by 2-3% qoq, helped by a full quarter’s worth of iPhone sales, the recovering economy and the increasing take-up of wireless broadband. While 1Q usually sees less marketing and acquisition costs, we think that the full quarter’s worth of iPhone subsidies would have negated that impact. As a consequence, we think that EBITDA margins dropped by 1-2% pts on a qoq basis, leading to a core net profit decline of 0-6%. M1 is scheduled to announce its 1Q10 results this Friday, 16 Apr. For StarHub, we think it will report revenue growth of 2-3% on a qoq basis, aided by the iPhone launch and the return of take-up for its more discretionary services. As a result, we think that a full quarter’s worth of iPhone subsidies would have caused EBITDA margins to range between flattish growth to a 0.5% pts drop, leading to a core net profit fall of 2-7% on a qoq basis. StarHub will announce its results on 6 May 2010.
• A fourth entrant? We view the likelihood of a fourth entrant as slim, following the proposed release of more 3G spectrum, because i) Singapore is a small and mature market, and ii) the new entrant would need deep pockets to build up a nationwide network, especially in-building coverage.
• OpCo progress running on time. Based on our recent meeting with NucleusConnect (NC), we gather that its rollout is progressing smoothly and on time. It is ready to launch its two central offices and the interoperability lab next month. It is seeing some fairly strong expressions of interest from retail service providers (RSPs) although it expects only a dozen or so to sign up. While no official confirmation has been given, NC expects a second OpCo to be constructed by SingTel, which is in line with our view. NC is anticipated to break even at the cashflow level only by 2015 or 2016.
M1 – UOBKH
Mobile And Agile
Triple-play riding on NGNBN. M1 will enhance customer retention by bundling multiple services. Traditionally a mobile and IDD service provider, M1 will expand into fixed voice and fixed broadband services with minimal capex when Next Gen Nationwide Broadband Network (NGNBN) is launched by mid-year. M1 budgeted capex of only S$10m for capacity to serve 100,000 fixed broadband customers and we expect 20,000 and 40,000 new subscribers to sign up in 2H10 and 2011 respectively. M1 could also deliver niche educational content through an IPTV platform, riding on infrastructure provided by NGNBN.
Growth in mobile data enhances ARPU. M1 benefits most from the proliferation of smartphones and growth in mobile data as mobile services accounted for 79.4% of its total service revenue in 4Q09, the highest among the three local telcos. The proportion of post-paid subscribers using smartphones has expanded to one-third over the past six months driven by the launch of Apple iPhone in Dec 09. Mobile service plans bundled with data are priced at about S$10 above those without data. Thus, we expect post-paid ARPU to increase by 4.1% over the next two years.
Rewarding shareholders with special dividend. We expect M1 to declare a special dividend of S$0.17/share when it announces 1H10 results in early August. Together with forecast interim dividend of 6.2 cents and final dividend of 6.4 cents, total dividend for 2010 is estimated at 29.6 cents. Management sees optimal net debt/EBITDA at 1.5x. We expect net debt/EBITDA to reach 1.1x in Dec 10, which leaves room for potential capital reduction exercise in 2011 or 2012. Initiate coverage with a BUY. Valuation is attractive with 2010 EV/EBITDA at 6.3x, compared to 10.3x for SingTel. We estimate 2010 free cash flow at S$0.21/share, representing free cash flow yield of 10.0%. The stock provides rich dividend yields of 14.2% for 2010 and 7.2% for 2011. Our DCF valuation for M1 is S$2.84 (required rate of return: 8.5%, terminal growth: 0%).
M1 – OCBC
Looking forward to NBN
Likely decent start to 2010. M1 Ltd will kick off the reporting season for the telcos and we expect to see a pretty decent set of 1Q10 results on 16 Apr 2010, driven by the rapidly recovering economy in Singapore; a MAS poll of 20 economists pegs the average GDP growth forecast at 9.5% for 1Q10. Mobile subscriber numbers have also been pretty encouraging, with total subscribers (2G+3G) up 0.1% from Dec to 6.865m in Feb, as the number of 3G subscribers continued to grow. We suspect one reason for this increase is probably due to the ongoing demand for the Apple iPhone 3GS, which M1 had started distributing in Dec 2009.
Outlook for mobile market remains buoyant. Although the mobile phone penetration rate has already hit 137.6% in Feb 2010, we believe that the proliferation of mobile Internet devices with standalone 3G SIM cards – like the Apple iPad 3G version – will continue to drive growth in the mobile market. We believe that M1’s recent capex in building up its own backhaul capabilities will enable it to garner a bigger share of this growing mobile data market. For the overall market, industry watcher Research and Markets predicts that Singapore’s mobile subscriber base will hit 7.750m in 2014, up 13% from 2009.
Looking forward to NBN. Besides the still buoyant mobile market, M1 is also looking towards the NBN (National Broadband Network) initiative for growth. More specifically, access to the previously restricted (or totally unavailable) home and business broadband markets will offer the highest growth opportunities for M1 and also allow the telco to become a “full service” provider. Already we see that its move to buy over Qala Singapore in Sep 2009 has started to bear fruits – we note that M1 has already started marketing its business broadband packages, with prices from as low as S$105.93/month for a 4Mbps Dynamic ADSL.
Maintain BUY with S$2.28 fair value. For the upcoming 1Q10 results, we expect M1 to post operating revenue of S$211.9m, up 13.7% YoY (but down 2.0% QoQ) and a net profit of S$39.8m, down 4.9% YoY (but up 7.1% QoQ). In any case, we intend to hold off adjusting our FY10 estimates until after the results. We also maintain our BUY rating as M1 could potentially benefit the most when NBN kicks off from mid-2010.