M1 launches new plans as portability deadline looms

But rival StarHub says the per second billing feature is nothing new

MOBILE telcos are continuing to pull cards out of their sleeves as the June deadline for number portability approaches.

M1, the smallest of the three listed telcos, has launched three new plans with enhanced benefits and per second billing.

Among the enhanced features of M1’s new SunSaver, SunSaver Plus and SunMax plans in addition to per second billing are free unlimited calls to three M1 numbers, a free SMS bundle that also covers MMS, a free outgoing talk time bundle that is extended to cover video calls and free IDD calls to 19 destinations for a top-up of $5.35 a month.

‘M1 has always listened to our customers and these new plans reflect their changing needs and desires,’ chief executive Neil Montefiore said in a press release last week.

However, per second billing is not a new feature to billing plans and some of the other features are also being offered by its competitors. In a swift riposte StarHub said that it has been offering per second billing since it launched in 2000 and that its free IDD service does not have top-up charges.

‘We would of course like to point out that our per second billing is offered on all our plans – postpaid and prepaid, and not simply on selected postpaid plans,’ said head of services and solutions Adit Harinasuta.

‘All our mobile customers have been enjoying these benefits for a long time, and they are all smart consumers who know where the value is.’

Singapore Telecommunications last month launched an innovative add-on line package. Its RedPac service allows unused SMSes and call time to a second user. StarHub and SingTel have started offering add-on lines such as this for a fixed monthly fee of about $10 a month.

The only operator that has not yet launched such deals is M1. It only offers a service that lets a second user to be linked to a main line but does not allow the sharing of unused talk time.

With increasing mobile phone penetration reaching second-tier users like children and the elderly, the strategy of rolling out packages for the whole family could pay off for the operators that get in early.

Slightly Below Expectations

Net profit dropped in Q4, but rose slightly for the full year FY07. For Q4 FY07, M1 reported operating revenue of S$206.9m (+2.9% yoy) and net profit of S$37.9m (-4.8% yoy). The increase in revenue was due to service revenue growth as the customer base increased from 1,337,000 on a yoy basis to 1,535,000.

The decrease in net profit was due to higher operating costs, which increased to S$160.7m (+7.8% yoy). The increase in operating expenses such as costs of sales, staff costs, depreciation and amortisation, facilities as well as general and administrative expenses more than offset the decrease in advertising and promotion expenses as well as provision for debts.

For the full year FY07, operating revenue of S$803.3m was 3.9% better yoy while the FY07 net profit of S$171.8m was 4.4% higher yoy. Nevertheless, the operating revenue and net profit are below our estimates of S$807.0m (4.6% below expectation) and S$180.0m (4.6% below expectation) respectively.

It has also recommended a final tax-exempt dividend of 8.3 cents per ordinary share. Together with the interim dividend of 2.5 cents per ordinary share, the full year payout is 80% of net profit after tax for 2007.

Outlook for FY08. M1 expects 2008 to be challenging as full mobile number portability will be introduced by the middle of the year. There are also new opportunities as M1, being part of a consortium, prepares to submit a bid to be the Network Company to design, build and operate the passive infrastructure layer fro the Next Generation National Broadband Network (NBN). Barring unforeseen circumstances, it expects operations to remain stable for 2008.

Maintain Hold with fair value reduced to S$2.16. Based on our valuation using the free cash flow to firm model, the target price is reduced from S$2.38 to S$2.16 due to lower-than-expected profit for FY07 and reduced estimates for revenues from FY08 onwards. M1 remains a hold as growth in revenues and profits are likely to be limited due to its focus on the domestic market.

Steady State in 2008

Bigger margin compression in 4Q07. Although MobileOne (M1) posted 4Q07 revenue of S$206.9m (+2.9% YoY, +3.3% QoQ) which came in 16.5% ahead of our forecast of S$177.6m, net profit of S$37.9m (-4.8% YoY, – 13.1% QoQ) fell about 9.4% from our S$41.9m estimate, damped by higher cost of sales. This was mainly due to a 122.9% YoY jump in leased circuit costs to S$10.7m to accommodate the increase in data traffic following the introduction of its mobile broadband services. There was also a 91.2% hike in traffic expenses to S$13.0m on the back of more international call business but as this came mainly from the value segment, it led to a 7% YoY (-10.9% QoQ) fall in M1’s 4Q07 EBITDA to S$76.5m. For the full year, M1 posted a 3.9% YoY rise in revenue to S$803.3m and a 4.4% increase in net profit to S$171.8m. We were expecting earnings to come in at S$175.8m on revenue of S$774.0m. M1 also declared a final dividend of S$0.083, bringing the total dividend to S$0.108.

Post-paid still most important. Operationally, M1 saw another increase of 68,000 subscribers in 4Q07, but the bulk came from the pre-paid segment, which added 58,000 users. Still, post-paid customers remained key and accounted for 89% of its 4Q07 revenue. And with expectedly aggressive promotions, there was a sharp 20.1% jump in average acquisition cost to S$209/user and a 23.5% hike in retention cost to S$147/user. And with the likely implementation of full number portability by 1H08, we can expect the acquisition/retention cost to remain high, if not higher.

Steady state expected in 2008. M1 believes its operations should enter a “steady state” this year, where it should be able to maintain its EBITDA margin at 45-46% as well as a payout ratio of at least 80%. Management also expects to spend S$110-120m in capex, where around S$30m will be spent on building its own backhaul system to reduce leased circuit costs from 2009 onwards. Other initiatives expected this year include bidding for the NGN program, either as a Netco or Opco with its HK partner, as well as running its call centre out of Kuala Lumpur.

Keep BUY with S$2.33 fair value. Thanks to its fairly resilient business and high payout ratio, we continue to like M1 as a defensive stock, especially in the current volatile market. We maintain our S$2.33 fair value and BUY rating.

M1 posts 4.8% fall in Q4 net profit to $37.9m

Full-year 2007 net profit up 4.4% to $171.8m; final dividend of 8.3 cents

MOBILEONE yesterday reported a 4.8 per cent fall in net profit to $37.9 million for the fourth quarter of 2007 as it spent more on keeping its customers and on higher staff costs.

The smallest of three telcos here said that full 2007 net profit was up 4.4 per cent to $171.8 million.

The fourth-quarter net profit missed the $41.3 million median estimate of six analysts surveyed by Bloomberg.

Q4 revenues rose 2.9 per cent to $206.9 million.

M1 announced a final dividend of 8.3 cents, bringing the total payout (including a capital distribution) to 15.4 cents for the year, representing an 8 per cent yield based on the $1.92 closing price yesterday.

Chief executive Neil Montefiore said that it had been a tough quarter, and 2008 would be even more challenging.

Although its customer base rose 14.8 per cent to 1.54 million, market share fell to 27.4 per cent at the end of November from 28.3 per cent in August and 28.5 per cent in November 2006.

Singapore’s mobile phone penetration rate stood at 116.1 per cent at end-November according to official data – meaning more than one phone per person.

Operating expenses rose 7.8 per cent to $160.7 million during the quarter while the average acquisition cost for each customer jumped 39 per cent to $209. Retention cost rose 4.3 per cent to $147.

In order to retain customers, M1 cut its handset prices. Money from handset sales was 25.9 per cent lower year-on-year at $19.7 million, though it was 22.4 per cent higher than in the third quarter of the year.

Staff costs increased 5.6 per cent to $22.6 million.

Mr Montefiore said that full mobile number portability – where customers can keep the same number when they change operators – due to be introduced in May, would be a challenge for all telcos, although he expects the impact to be neutral on M1. Much bigger rival Singapore Telecommunications, which has the largest customer base, is expected to feel the most impact when number portability is introduced.

M1 will continue to work at reducing costs this year. Initiatives include building its own circuit network, which so far is leased from SingTel. It has already moved its call centre to Kuala Lumpur and expects staff savings of 30-40 per cent.

M1 said that capital expenditure for 2008 will be between $100 million and $120 million. It expects operations to remain stable.

Free cash flow fell 28.8 per cent to $172.7 million at end-2007.

M1 will continue to look at returning excess cash to shareholders every quarter. It also will retain some flexibility for investment opportunities, Mr Montefiore said.

As for the impact of an economic slowdown, Mr Montefiore said that in his experience, telcos are a ‘recession proof’ business.