Category: M1
M1 – BT
M1’s Q1 profit up 10.3%, helped by tax adjustment
Results show underlying weakness in core cellular business
A TAX adjustment helped lift MobileOne’s first quarter net income up 10.3 per cent to $41.9 million but the gain failed to mask the the underlying weakness in its core cellular business.
The increase was largely due to a reduction in Singapore’s corporate tax rate, M1 said in its regulatory filing yesterday. The move translated to a 75 per cent reduction in M1’s Q1 tax provision to $2.2 million, from $8.8 million a year earlier.
The firm’s earnings per share for the period was 4.7 cents, 9.3 per cent higher than 2008.
The ceasefire following the all-out marketing war between the three local telcos as a result of mobile number portability (MNP) last year lent M1 some reprieve in Q1.
Customer acquisition and retention cost in Q1 was $121 and $113, down 15.4 per cent and 16.9 per cent respectively year-on-year.
Cost of sales also dropped 6.7 per cent to $71.9 million in Q1 compared to the previous corresponding period. The conclusion of festive promotions also led to a 30.4 per cent sequential decline in advertising and promotion expenditure to $19 million for the quarter.
However, the company continues to be a victim of MNP, losing 11,000 customers in the last three months to end Q1 with a mobile customer base of 1.62 million.
While the number is 4.2 per cent higher than the tally last year, the growth is lower than rivals StarHub and SingTel.
This means that M1’s market share has now dipped to 25.4 per cent from 26.5 per cent in 2008. Churn rate, or the number of customers leaving M1, stood at 1.6 per cent in the first quarter, up from 1.3 per cent last year.
M1’s post-paid revenue slid 9.9 per cent year-on- year to $122.6 million as a result of aggressive bundling by rivals StarHub and SingTel, as well as exclusive deals for handsets such as the Apple iPhone. Its prepaid sales however, increased by 3.5 per cent to $17.7 million.
The ongoing recession also crimped customer spending on services such as international calls, with revenue from this segment dropping 5 per cent to $32 million in Q1.
One positive trend amid the gloom is the uptake in other M1 services such as its broadband offerings. The firm’s non-voice sales now account for 25.1 per cent of total service revenue, up from 23.2 per cent last year.
The company’s first-quarter operating revenue came in 8.6 per cent lower at $186. 4 million.
Earlier this month, M1 lost the bid to operate Singapore’s upcoming fibre-optic broadband network to StarHub, but it maintained the desire to move from pure mobile play to become a ‘full-service operator’ when the new Internet highway is in place.
‘Based on the current outlook, and taking into consideration the benefits arising from the government measures announced in Jan 09, we continue to expect operations to remain stable for the year 2009,’ the company said.
M1 shares closed unchanged at S$1.47 yesterday before its earnings were released.
M1 – CIMB
Sailing again
1Q09 results preview
Flat core net profit expected. M1 is slated to release its 1Q09 results on 16 Apr 09. We expect a core net profit of S$35m-37m (from S$36.6m in 4Q08) on the back of a 3-4% qoq decline in revenue and 1-2%-pt increase in EBITDA margins. 1Q is a seasonally low quarter, whereas 4Q is the strongest typically, exacerbated by holidays like Chinese New Year and shorter months which would curtail usage. In addition, roaming revenue which makes up about 15% of the total would have been affected by slowing business activity and travel. On the other hand, EBITDA margins should improve from easing subscriber acquisition and retention costs (SARC). On top of that, we do not expect any dividends for 1Q, as has been the practice in the past few years.
Another potential area of weakness in the longer term is revenue from migrant workers, which comprises an estimated 13% of M1’s revenue. This segment may soften if workers are repatriated but we have not seen mass departures as the construction industry remains buoyant.
Main beneficiary of NGNBN. Although M1 lost the OpCo bid to StarHub, we believe it succeeded in forcing the winning bidder to offer low prices, similar to the NetCo experience. The outcome is positive for M1, we believe, as it stands to save almost S$15/month/subscriber as OpCo lowers wholesale pricing from S$35.71 that StarHub charges currently to S$21 and the low prices will help it undercut existing broadband prices. On top of that, NGNBN would allow M1 to compete more equitably and address its current single-product disadvantage.
Any capital-management initiatives? Having lost the bid for OpCo, M1 is relieved of the need for additional capex. Based on our recent discussions with the telco, it seems it is unlikely to declare any special dividends or capital reductions this year. In the current climate, it would be more prudent to reserve cash although its gearing is low. M1’s net debt/EBITDA is 0.7x, substantially below its rivals’ 1.2-1.3x. Historically, except for 2Q07, M1 had undertaken capital-management initiatives when its net debt/annualised EBITDA was below 0.3x.
Valuation and recommendation
Maintain OUTPERFORM, earnings forecasts and DCF-based target price of S$2.13 (WACC: 8.3%, LT growth: 1.0%). The recent OpCo result reinforces our positive view on M1, which is expected to be the largest beneficiary of NGNBN. Rerating catalysts could include improving core net profits, strong dividends and the favourable outcome from NGNBN. We recently upgraded SingTel to our top pick for Singapore, supplanting M1. This is because of receding risks at SingTel and its higher beta, which should benefit the stock in the current bullish market.
TELCO – Phillip
NGNBN OpCo Winner
StarHub is the winner. The Infocomm Development Authority of Singapore (IDA) announced that it had selected StarHub as the Next Generation National Broadband Network Operating Company (NGNBN OpCo). StarHub will establish Nucleus Connect to install equipment for the active infrastructure. It will invest about S$100m and receive S$250m grant from the government for the network. Nucleus Connect will work with OpenNet, which will lay the cables for the network. OpenNet comprises Canada-based Axia and three local companies, SingTel, Singapore Press Holdings and SP Telecommunications.
Commercial services start from 2010. Nucleus Connect is expected to start commercial operations in 1Q 2010. Moreover, by June 2012, 95% of homes and offices can expect to have access to high-speed broadband Internet access.
Nucleus Connect will offer a wholesale price of S$21 per month for a 100 Mbps residential end-user connection and S$121 for a 1Gbps connection. For nonresidential purposes, it will offer a wholesale price of S$75 per month for a 100 Mbps connection.
Impact from NGNBN. Nucleus Connect will also be bringing more retail service providers in addition to the three existing players, SingTel, StarHub and M1. We expect greater competition in providing Internet services and the losers are likely to be the existing players. The benefits will be lower costs and faster access for consumers. In fact, we expect the retail price to range from S$25 to S$30 for a 100 Mbps residential end-user connection and S$140 to S$160 for a 1Gbps connection.
SingTel and StarHub are expected to see erosions in profit margins due to more competitors offering lower retail prices. For M1, which is currently the smallest player in the Internet business, we expect it to grow its Internet subscriber base as there is now greater clarity in the cost of wholesale Internet services. M1 does not have Pay TV and will have to grow its Internet business segment to maintain its revenue growth.
Stock recommendation. Currently, the Internet segment contributes 9.3% and 11.9% to the total revenue of SingTel and StarHub in FY2008 while M1 is a new player in the Internet market. We have reduced the revenue estimates for the Internet segment for SingTel and StarHub slightly from FY2010F onwards to reflect the lower retail prices. We have also increased the revenue estimate for the Internet segment for M1 from FY2010F onwards to reflect the likelihood of it gaining new subscribers. Nevertheless, as the revenue from Internet business constitutes only a small portion of the total revenue of the three telecommunications operators, there is no impact on our ratings and fair values for SingTel, StarHub and M1.
M1 – BT
M1 to try out mobile payments
Telco partners Citibank and Visa in three-month pilot scheme
MOBILEONE has become the latest telco to dip its toes into the nascent market for mobile payments, with the launch of a trial to allow customers to tap-and-pay for everyday purchases with their handphones.
The trial, which starts in May, in partnership with Citibank and Visa, will allow 300 Citi M1 Platinum cardholders to whip out their phones instead of the usual plastic to pay for items at more than 750 retail outlets.
The payment function relies on near-field communications (NFC) – the same technology used on trains and buses to allow passengers to tap and pay for fares.
In the MobileOne trial, participants will be issued with an NFC-enabled handset that has been pre-loaded with Visa’s contactless payWave application.
The software links the phone to a Citibank M1 Platinum card account and allows the device to transmit this information to special payWave terminals at participating outlets such as The Coffee Connoisseur, Mrs Fields and Gramophone.
The Visa payWave system is touted to be able to halve transaction times and eliminates the need for a cardholder’s signature, making it suitable for making small, everyday purchases such as a cup of coffee, movie ticket or CD.
During the pilot scheme, cardholders can only use their handsets to pay for items costing less than $100. The same limit is being imposed on payWave transactions on the One Card by United Overseas Bank, the first local credit card to support Visa’s contactless payment technology when it debuted in 2007.
M1, Citibank and Visa are hoping to use their three-month experiment to assess the viability of phone payments in Singapore, as well as consumer preferences when using the tap-and-go system.
As a sweetener to get participants to open their mobile wallets, they will be allowed to keep their phones after the pilot scheme if they carry out more than eight transactions a month. The cost of the trial has not been disclosed.
The promise of phone payments has seen a renaissance in recent years as a result of explosive handset growth and the advent of technologies such as NFC.
With a sky-high mobile penetration rate of 131 per cent, Singapore is seen as a prime candidate for seeding mobile wallet projects.
‘This is Singapore’s first pilot of mobile payments linked to a credit card,’ John Denhof, Citibank Singapore’s business director of credit payment products, told reporters at a briefing yesterday.
The island’s top two telcos have experimented with NFC payment options in the past. StarHub, for example, partnered EZ-Link in 2007 to test the feasibility of using phones to pay for bus and MRT rides.
And in the same year, Singapore Telecom launched an NFC trial with Nets (Network for Electronic Transfers) which allowed phone payments at 500 participating outlets. However, these companies have not taken the next step of large-scale commercial rollout.
‘We want to be ahead of the curve when it gets adopted,’ Mr Denhof said.
TELCOs – OCBC
Stable 2009 outlook
Resilient 4Q CY08 earnings as expected. All the three telcos – MobileOne, SingTel and StarHub – reported a pretty resilient set of results recently. M1’s 4Q08 results, though slightly weaker YoY and QoQ, were slightly better than expected, aided by an improvement in EBITDA as it had been less aggressive during the traditionally competitive holiday period. SingTel’s 3Q09 results were broadly in line with our forecasts, although there was some disappointment with its regional associates’ performances. Likewise for StarHub, its 4Q08 results were also within our expectations, while its FY08 earnings were slightly better than our estimate.
Operationally still going strong. But more importantly, all three telcos expect their operations to remain stable in 2009. For M1, it is also looking to keep its service EBITDA margin of 43-44% and maintain its 80% dividend payout ratio. For SingTel, it expects operating revenues for both Singapore (excluding SCS) and Australia to grow at mid single-digit levels, with Singapore’s EBITDA margin staying at 40%; but warns of lower associate contributions and adverse forex movements. Lastly, StarHub expects FY09 operating revenue to grow by low single-digit, while keeping service EBITDA margin at 31%; more importantly, it aims to continue to pay S$0.045/share dividend quarterly, making for S$0.18 total for the full year.
More rational competition amid slowing economy. But the rapidly slowing economy will continue to impact consumer spending, and while we do not expect the telcos to be spared, we believe that the impact should be relatively limited as we see telecom services as being a need rather than as a luxury. We also expect less aggressive sales & promotion (S&P) expenses. We have already been seeing an easing in the telcos’ acquisition costs over the past two quarters and we see this trend continuing although M1 may have to maintain a relatively higher S&P ratio versus the other two telcos to make up for its lack of bundling abilities. Otherwise, we expect the telcos to maintain status quo.
Maintain Overweight on telcos. Even though we are penciling in modest declines in both revenue and earnings for all three telcos this year, these declines pale in comparison to expected tumble in earnings of companies reliant on discretionary spending. Hence we still expect telcos to show relative outperformance this year, backed by their attractive dividends (M1 and StarHub). As such, we maintain Overweight on the sector.