Dividend surprise

While M1’s FY13 core net profit missed our estimate (94% of our forecast), its dividend exceeded our raised expectations. The earnings miss was largely due to higher-than-expected opex. However, its core net profit met consensus expectations(98% of FY13 estimates). M1 proposed a final DPS of 7.1 Scts and a special DPS of 7.1 Scts, bringing the full-year total to 21 Scts (121% payout),up 44% yoy. The take-up of tiered data plans surged 17%pts qoq to 49%,which we believe offset the lower international roaming revenues. We cut our FY14-15 EPS by 6-14% and DCF-based (WACC 7.2%) target price by 7.3%. However,M1 remains an Add with the dividend surprise and rapid take-up of tiered data plans acting as likely re-rating catalysts.

An accounting matter

FY13 earnings missed our estimates as more Android devices were sold vs. iPhones. M1 smoothens out the iPhone subsidy by recognising a large part of the future revenues to offset the subsidy, while the subsidy for an Android device is expensed off without recognising the revenue upfront. Also, the higher-than-expected labour and traffic costs hurt FY13 earnings.

Data growth offsets lower roaming revenues

The adoption of tiered data plans surged 17% pts to 49%, ahead of our expectations, and appears to have offset the decline in international roaming revenues. This is indicated by post-paid ARPU which seems to have bottomed out (Figure 3). International roaming revenues now make up 10-12% of total revenues vs. 12-15% previously. The users of tiered data plans pay S$3/month more than the users of the old plans (5% of post-paid ARPUs), while the lower data bundles force heavy data users to upgrade.

Rapid fixed broadband take-up

A key growth driver is fixed broadband, which formed 8% of the total revenues in FY13 vs. 6% in FY12. The fixed broadband revenue was driven mostly by the take-up of lower-end plans as indicated by the rapid 6% qoq and 13% yoy fall in 4Q13 ARPUs (Figure 1). The subscriber base rose 10% qoq and 64% yoy.

Delivered on dividends

M1’s total FY13 DPS of 21 Scts was above our estimate of 19 Scts which we had raised from 16 Scts earlier.

Declares S$0.07 special dividend

• Payout of 121% vs. 80% minimum
  
• Sees moderate NPAT growth
  
• Raising FV to S$3.30
  

FY13 results still in-line; declares S$0.07 special dividend

M1 Ltd reported 4Q13 revenue of S$278.6m, down 14.9% YoY, affected by lower handset sales (down 46.3%); but EBITDA slipped by a smaller 2%, with service EBITDA margin holding relatively steady at 38.2% in 4Q13, versus 41.6% a year ago. Net profit climbed 6.9% to S$40.5m, mainly due to lower taxes (down 44.6%). FY13 revenue fell 6.4% to S$1007.9m, and was around 3.8% below our forecast, while net profit climbed 9.4% to S$160.2m, or 3.5% above our forecast. M1 declared a final dividend of S$0.071 per share and a special dividend of S$0.071 as well, bringing the total full year dividend to S$0.21 per share. This translates into a payout ratio of 121% of its earnings, versus its official minimum payout ratio of 80%.

Guiding for moderate earnings growth

Going forward, management believes that it can continue to achieve moderate earnings growth (within the single-digit range), driven by increased mobile data usage as customers upgrade their smartphone plans (already 49% are on tiered pricing, with 16% exceeding their data allocation) and also pre-paid customers adopting smartphone plans. While it continues to see growth in fixed services, it notes the ongoing price competition in that segment; but believes it should be “promotional” rather than structural. Nevertheless, it notes that a growing adopting of the mass market plan (200Mbps at S$39/month) could see further erosion in ARPU. It has also guided for slightly higher capex of S$130m

Maintain HOLD with higher S$3.30 fair value

Factoring in the latest developments, we opt to pare our FY14 revenue forecast by 8% but increase our earnings estimate by 2%. Our DCF-based fair value will also improve from S$3.17 to S$3.30 as we roll forward to FY14. As we are unlikely to see a repeat of such a hefty special dividend this year, we maintain our HOLD rating.

Dishing out special dividends

• M1 declared a special dividend of 7.1 cents for FY13, as expected. Including the final dividend of another 7.1 cents, it will pay out 120% of its FY13 profit.
  
• In our view, there could be more special dividend payouts to come as we expect free cash flow to remain strong this year and capex to decline next year.
  
• Maintain BUY. TP is lowered slightly to SGD3.86 as we factor in lower growth forecasts for fibre revenue that will slightly offset strong growth in data usage.
  

What’s New

M1’s FY13 net profit of SGD160m was slightly below our expectations of SGD169m, mainly due to lower-than-expected fibre revenue. But the telco delivered on the one thing we had anticipated the most – an additional substantial payout to shareholders. It declared a special dividend of 7.1 cents a share for FY13, equalling the final dividend of 7.1 cents a share. Taking advantage of its strong balance sheet, with a net debt/EBITDA ratio of just 0.6x, M1 will be paying out 120% of its FY13 net profit in total.

What’s Our View

We lower our target price slightly to SGD3.86 as we scale back our FY14E-16E forecasts on lower expectations for the fibre business. However, we think there is potential for M1 to further return cash to shareholders this year. Its free cash flow should remain strong in FY14E and guidance for lower capex in FY15E indicates that net debt/EBITDA will stay low at 0.6-0.7x for this year and the next. We maintain our BUY call on M1, which stays as our top Singapore telco pick.

Dishing out special dividends

• M1 declared a special dividend of 7.1 cents for FY13, as expected. Including the final dividend of another 7.1 cents, it will pay out 120% of its FY13 profit.
  
• In our view, there could be more special dividend payouts to come as we expect free cash flow to remain strong this year and capex to decline next year.
  
• Maintain BUY. TP is lowered slightly to SGD3.86 as we factor in lower growth forecasts for fibre revenue that will slightly offset strong growth in data usage.
  

What’s New

M1’s FY13 net profit of SGD160m was slightly below our expectations of SGD169m, mainly due to lower-than-expected fibre revenue. But the telco delivered on the one thing we had anticipated the most – an additional substantial payout to shareholders. It declared a special dividend of 7.1 cents a share for FY13, equalling the final dividend of 7.1 cents a share. Taking advantage of its strong balance sheet, with a net debt/EBITDA ratio of just 0.6x, M1 will be paying out 120% of its FY13 net profit in total.

What’s Our View

We lower our target price slightly to SGD3.86 as we scale back our FY14E-16E forecasts on lower expectations for the fibre business. However, we think there is potential for M1 to further return cash to shareholders this year. Its free cash flow should remain strong in FY14E and guidance for lower capex in FY15E indicates that net debt/EBITDA will stay low at 0.6-0.7x for this year and the next. We maintain our BUY call on M1, which stays as our top Singapore telco pick.

Roamers hanging up

At 94% of our forecast, M1’s annualised 9M13 core net profit was in line as we expect 4Q13 to be stronger qoq on lower subsidies.But M1 is a little ahead of consensus estimates at 98%. Data revenue was the key driver,but M1 was draggedby weaker roaming and IDD revenues.

We revise our FY14 DPS to 19 Scts to include a special DPS of 4 Scts and a final DPS of 8 Scts on the back of a net debt/EBITDA of only 0.5x. As such, we tweak our EPS estimates down. M1 remains an Outperform with a higher DCF-based target price after rolling a year forward. Likely price catalysts are a special dividend and earnings surprise.

Roaming is drowning

M1’s 3Q13 service revenue was flat qoq, despite a 6% rise in the adoption of tiered data plans to 32% (Figure 2). The growth in data revenue was diluted by: 1) lower roaming revenues due to lower inter-operator termination (IOT) rates and fewer travellers not using international data roaming by buying prepaid cards or using free WiFi at their travel destinations. We expect this phenomenon to continue because of expensive roaming rates, conveniently-available prepaid SIM cards in Singapore and most countries, and downward trend on the IOT. Roaming revenue contributes 12% of M1’s net revenues; and 2) weaker IDD revenues on lower tariff. As a result of these factors, service revenue slowed from 9% yoy in 2Q to 5% in 3Q (Figure 5). Device subsidies dipped 7% qoq despite the launch of the Samsung Galaxy S4 in mid-Jul. This reflects the lower selling price of this device.

iPhone 5S and 5C and 4Q

We expect EBITDA and EBITDA margin to rise qoq in 4Q on the back of the iPhone 5S/5C which were launched at end-Sep. Unlike the subsidy of other devices which are expensed, that of the iPhones are amortised over the term of their contract.

Capex

M1 expects 2014 capex to be similar to 2013’s S$130m on the back of projects spilling over from this year. This includes the expansion of its office space and upgrade of its billing system.