Category: M1
TELCOs – OCBC
1QCY09 results likely steady
Likely steady results from SingTel and StarHub. Based on the relatively steady results from MobileOne (M1) last week, we are also looking forward to similar showing from SingTel and StarHub when these companies report quarterly results over the next few weeks. As a recap, M1’s 1Q09 results were mostly within expectations; topline slipped 8.6% YoY and 4.3% QoQ to S$186.4m, but net profit jumped 10.4% YoY and 14.5% QoQ to S$41.9m, albeit due to one-off accounting adjustment for the 1%-point corporate tax rate reduction; EBITDA service margin was steady at 44.6%, despite suffering a near-12k drop in subscribers.
Associates – main concern for SingTel. On 14 May 2009, SingTel will announce its 4Q09 results. We expect revenue to show a modest QoQ decline (<5%) as we expect the economic slowdown to exert a slight toil on its business; the weaker AUD is also expected to negatively impact its consolidated revenue. But the biggest concern will still be its regional mobile associates – SingTel had earlier guided for lower overall pre-tax contributions. As such, we are looking for a slightly larger fall (<10% QoQ) in 4Q09 earnings, buffered by the inclusion of contributions from recentlyacquired Singapore Computer Systems (SCS).
OpCo – medium-term positive for StarHub. On 7 May 2009, StarHub will announce its 1Q09 results – we are pencilling in a modest QoQ (<5%) drop in both revenue and earnings due to the impact of the economic slowdown. And we do not expect any changes to its stated S$0.045/quarter dividend policy, despite StarHub landing the OpCo bid for the NBN; based on our estimates, its strong operating cashflow should be sufficient to fund most of its higher capex requirements (likely to kick in from next year onwards). In any case, we see the OpCo win as a medium-term positive for StarHub and have adjusted our numbers recently.
Keeping sector as Overweight. Despite the recent rally in the overall market, where there has been a shift towards higher beta stocks in the belief that the worst of economic/financial crisis is behind us, we are not convinced that there will be a rapid recovery. We believe that investors should continue to hold on to some defensive stocks such as telcos for their less vulnerable earnings and stable dividend payouts as a means of portfolio diversification. As such, we maintain our OVERWEIGHT rating on the sector.
M1 – Phillip
1Q FY2009 results
1Q FY2009 results. For 1Q FY2009, M1 reported operating revenue of S$186.4m (-8.6% yoy), profit before tax of S$44.1m (-5.8% yoy) and net profit of S$41.9m (+10.3% yoy).
There are four main revenue segments: telecommunication services, international call services, fixed network services and handset sales. Telecommunication services registered 8.4% ecrease in revenue to S$140.3m. Postpaid revenue fell by 9.9% to S$122.6m while prepaid revenue ncreased by 3.5% to S$17.7m. Moreover, international call services posted 5.0% drop to S$32.0m while handset sales fell by 18.7% to S$13.9m. Fixed network services was a new segment that contributed revenue of S$0.3m.
Operating expenses also decreased to S$141.3m (-9.0% yoy) due to lower handset costs and staff costs. M1 benefitted from the Jobs Credit Scheme, paid lower bonus and hired fewer staff.
Despite the drop in revenue, net profit increased mainly due to the 75.0% decrease in provision for taxation from S$8.8m in 1Q FY2008 to S$2.2m in 1Q FY2009. This was a result of the reduction in corporate tax rate from 18% to 17%.
Profit margin. Net profit margin increased from 18.8% in 4Q FY2008 to 22.5% in 1Q FY2009 due to the tax adjustment. Based on a year-on-year comparison, it rose from 18.6% in 1Q FY2008 for the same reason.
Decrease in market share. M1 saw a decrease in the number of prepaid and postpaid customers from 748,000 and 882,000 in 4Q FY2008 to 740,000 and 879,000 in 1Q FY2009 respectively. Its market share for the prepaid and postpaid segments has also decreased from 24.4% and 27.2% in 4Q FY2008 to 23.9% and 26.8% in 1Q FY2009 respectively. As M1 does not have Pay TV, it is unable to offer bundled services to customers. This is a concern as it is likely to lose market share to SingTel and StarHub.
Outlook for FY2009. M1 expects 2009 to be a challenging year due to the global financial crisis. Despite the economic downturn, it expects operations to remain stable. Moreover, its dividend policy for 2009 is to pay 80% of net profit after tax as dividend.
Maintain Hold with fair value at S$1.67. Based on our valuation using the free cash flow to firm model, the target price is at S$1.67. M1 remains a hold due to its limited focus on the domestic market and the lack of Pay TV services. The dividend yield of M1 is 8.8%.
M1 – CIMB
Good cost-control amid revenue pressure
• Within expectations. 1Q09 core profit was spot on, making up 24.9% and 25.3% of our full-year forecast and consensus respectively. Reported profit includes a S$5.5m tax adjustment for a lower corporate tax rate from 18% to 17%. 1Q was characterised by topline fatigue, steady margins and continued market-share loss. No dividend was declared, as expected.
• Weak revenue. Top line slipped 9% yoy and 4% qoq due to competition, lower roaming and reduced handset sales. Postpaid revenue dropped 9.9% yoy and 4.4% qoq from fewer subscribers due to competitors’ bundling and exclusive handset offerings and M1’s own per-second billing and multi-line savers which eroded its ARPUs. Roaming accounted for 15% of mobile revenue, and usage has been coming off due to a slowing economy.
• Cost-controls masked by Take3. EBITDA margins ticked up 0.6% pt qoq and 2.3% pts yoy from more active cost-control, particularly of handset (-24.3% yoy) and staff costs (-20.8% yoy). However, lower handset costs were masked by its Take3 programme which amortises handsets over the life of contracts vs. expensing under other schemes.
• NGNBN pursuit. M1 is intent on its transformation into a full-service operator. This should gain momentum once NGNBN is operational. Strategies have not been revealed but M1 has been gaining experience from reselling StarHub’s broadband access. Consistent with our view, M1 sees downward pressure on retail broadband tariffs from low wholesale pricing.
• Guidance reiterated. M1 held on to its FY09 guidance of stable operations, implying stable PATs despite a challenging economic outlook. This also implies a stable DPS for FY09, in our view.
• Reiterate OUTPERFORM, earnings forecasts and target price. While we retain our OUTPERFORM rating, we flag growing concerns over its market-share loss, postpaid weakness and the scope for further cost-controls. For now, we retain our earnings forecasts and DCF-based (WACC: 8.3%) target price of S$2.13. Re-rating catalysts could include a reversal of market-share loss, qoq improvements in earnings, strong dividends and a favourable outcome from NGNBN.
M1 – DBS
Good results for a weak quarter
Excluding exceptionals, 1Q09 net profit of S$36m (-4% y-o-y, flat q-o-q) exceeded our expectation despite significant lower revenue, due to effective cost control. Including dividends, M1 outperformed the STI by 2% YTD, but its solid 9% yield is the key attraction. M1 remains a BUY although we nudged up our estimates, and target price to S$1.60. There is potential upside to our FY10F earnings because of S$15-20m backhaul cost savings.
Earnings better than expected despite revenue contraction. Excluding S$6.6m exceptional income (S$5.5m in tax credit and S$1.1m from interest rate swap), net profit of S$36.4m (-4% y-o-y, flat q-o-q) exceeded our expectation of S$34m. This was despite a larger than expected 8.6% y-o-y drop in revenue; the company registered higher EBITDA margin because of (i) lower staff costs due to job credit scheme and lower facilities expenses due to lower rentals, (ii) lower handset costs as M1 started to amortize handset subsidies over a longer contract period instead of fully expensing it in the quarter under its new promotion “Take3”.
Market share loss coupled with decline in churn rate. M1 lost more market share than expected which management attributed to a spike in competitive intensity and weak economy. Meanwhile, postpaid ARPU also fell more than expected, due to promotions on bundled mobile plans by M1. Management hopes to arrest market share loss with its new promotion “Take3” that was launched in late Feb09. On a positive note, churn rate declined for the third consecutive quarter to 1.6%.
Management reiterates stable FY09F earnings. But they hesitated to guide for stable top line. Lower staff and facilities costs should continue to benefit the company. We maintain a BUY rating for M1, with a revised target price of S$1.60 based on 10x FY09F PER. There is a potential upside to our FY10F earnings arising from S$15-20m backhaul cost savings.
M1 – DMG
No big surprises
Operational earnings down, in line with expectations. In the first quarter to Mar 09, revenue declined 8.6% to S$186.4m while earnings rose 10.3% to S$41.9m. The improved net margins were largely a result of tax adjustments for reduction in corporate tax rate. Taking out the tax impact, the results would be within our expectations.
Balance sheet improves further. Due to strong cash flows, M1’s key leverage ratios have improved. Net gearing now stands at 0.68x, against 0.85x a year ago. EBITDA/Interest, at 45.2x, is the highest among the telcos, and an improvement over the 37.6x it recorded in the previous corresponding period. Some concerns. M1’s post-paid market share fell from 27.2% in 4Q08 to 26.8% in 1Q09. While the level of competition tapered off in 4Q08, it intensified again in the past few months. From the tone of the management, we gather that should its market share continue to fall, it will retaliate aggressively. M1 has already introduced innovative programmes like Take3 to win over new customers. One other concern investors may have is the vacuum at the top after the departure of Neil Montefiore in Jan 09. Acting CEO and CFO Karen Kooi indicated that the new CEO will be unveiled “very soon”.
NBN plans. M1 believes it will benefit from the NBN when it becomes operational in 2Q10. In our view, it may not be as rosy. We expect SingTel and StarHub to launch aggressive campaigns to lock in customers later this year, pushing market penetration past the 90% mark by then. Morever, the low wholesale prices will attract new players, which will place pressure on broadband prices.
Maintain estimates and call. We are maintaining our earnings estimates for M1, with a 5.6% contraction to S$141.6m in FY09 and a growth of 4.6% to S$148.1m in FY10. Based on DDM, we attain a target price of S$1.52. Given the limited upside, we maintain NEUTRAL on M1.