Category: M1
Singapore TELCOs – CS
Go counter-consensus: hold M1 not StarHub
■ Event: We are assuming coverage of StarHub with an UNDERPERFORM rating relative to the Singapore market and a target price of S$2.92. While there is 0.7% upside to our target price, FY08 earnings growth is set to be considerably slower than the Singapore market (led by banks, property stocks and industrials). In contrast, we are assuming coverage of M1, consensus’ least preferred Singapore telco, with a NEUTRAL rating and a target price of S$2.40; 14.3% potential upside. Unlike StarHub, we believe that M1 is already priced for the low growth available in the industry.
■ View: After what we expect to be a brief reacceleration in revenue growth in FY07, growth rates are expected to resume a downward trend from FY08. With cellular penetration at 111.2%, we expect a revenue CAGR of only 1.8% from FY07-10. StarHub’s exciting brand and successful bundling strategy are expected to deliver 3.3% compound cellular revenue growth from FY07-10, versus only 0.7% growth from M1. However, this differential is sharply lower than the 12.6% CAGR StarHub achieved from FY04-07, versus M1’s 2.3% compound growth over the same period.
■ Catalyst: As M1 fights back in the cellular market, the 2Q07 results saw an upward revision in its guidance, StarHub’s remained unchanged. While StarHub enjoys dominance in Pay TV, SingTel has now entered the market and, if nothing else, is driving up content costs faster than StarHub’s Pay TV revenues. A significant downside shock could occur to StarHub and SingTel if the next generation network’s (NGN) plans result in new fixed lines being built; M1 can only gain if NGN is genuinely opened to resellers.
■ Valuation: As the sector growth rates slow, becoming increasingly “bondlike”, cash flow yield should become the key metric. StarHub is trading at an FY07 cash flow yield of 6.7%, while M1 is trading at 9.8%. On capital management, a target net-debt-to-EBITDA ratio of 2.0x in FY08 would allow a 13.4% additional yield from StarHub, but 23.3% from M1. We find this divergence too wide, given the converging (and slowing) growth rates.
M1 – Phillip
Q2 FY07 Results
Net profit continued to rise. For Q2 FY07, M1 reported net profit of S$40.6m (+10.0% yoy) and revenue of S$199.8m (+4.0% yoy). The increase in revenue was due to service revenue growth as the customer base increased by 181,000 on a yoy basis to 1,409,000. In fact, the increases in revenues from mobile telecommunications services (+6.2 yoy) and international call services (+13.1 yoy) more than offset the decline in handset sales (-16.5% yoy). The lower corporate tax rate of 18% also contributed to the increase in net profit.
On a half-year basis, revenue of S$396.2m was still 3.5% better yoy while 1H06 net profit of S$90.3m was 10.3% higher.
M1 remained attractive as a dividend play as it announced dividend distribution and capital reduction. In line with its intention to maintain a pay-out of at least 80% of net profit after to shareholders for FY07, M1 proposed to an interim dividend of 2.5 cents per share and a capital distribution of 4.6 cents per share without share cancellation.
Outlook for FY07. M1 estimated a single digit growth in profit after tax for FY07 barring unforeseen circumstances. In the postpaid segment, M1 expected an increase in customer base due to M1 broadband due to the simple “Plug & Play” devices and competitive price plans. Due to the launch of 3G Entertainment Buffet and the joint promotion of MeTV as well as new 3G and HSDPA handsets, it would likely see an increase in revenue. However, the prepaid segment remained competitive as a result of increased competition in the market and reduced tariffs by all operators.
M1, as part of the consortium with Hong Kong Broadband Pte Ltd, continued to participate in the IDA’s ongoing Request for Proposal process for the Next Generation Broadband Network and the results of the bid would be known by end 2007.
Maintain Hold with fair value raised to S$2.38. We expected FY07 net profit to increase by 9% yoy and FY08 net profit to gain by 5% yoy. The customer base and resulting revenue were likely to improve as the Singapore economy was expected to grow in 2007 and 2008. There would also be demand from new customers as the government continued to attract foreign investors and immigrants. M1 remained a hold as growth in revenues and profits were likely to be limited due to its focus on the domestic market. The increase in DCF-based fair value from 2.21 to 2.38 was to reflect the upgrade in FY07 and FY08 earnings.
M1 – OCBC
Good 2Q performance
Good results due to lower costs and better ARPU. MobileOne (M1) delivered a good set of 2Q07 results. Revenue came in at S$199.8m (+1.7% QoQ, 4.0% YoY) with net profit for the quarter at S$40.6m (-19.0% QoQ, +10.0% YoY). The reason for the sequentially decline is due to a positive tax adjustment in 1Q07 from the change in corporate tax rate to 18%. Excluding the one-off tax adjustments (i.e. at pre-tax level), M1’s 2Q07 pretax profit came in at a strong S$50.4m, +10.0% QoQ and 7.2% YoY. The stronger profitability is also reflected by the EBITDA improvement to S$81.9m, +7.5% QoQ and 6.0% YoY. The better operating performance appears to be driven by revenue growth and lower operating expenses.
Post-paid segment star. Over the last quarter, M1 saw 31k increase in the number of subscribers – 14k new prepaid and 17k new postpaid customers. However, even though prepaid had more customers and MOU increased, its revenue continue to fall a further 3.3% QoQ. This in turn led to ARPU for prepaid falling 5.3% QoQ to S$16. The poor performance for prepaid was probably due to aggressive promotions by M1’s competitors and the situation is not expected to lessen anytime soon. But on a positive note, M1’s postpaid segment saw revenue growth of 3.6% QoQ with ARPU improvement of 2.6% QoQ to S$62.2, neutralizing the revenue decline from prepaid, giving an overall mobile revenue improvement of 2.9% QoQ.
Number portability delayed. In the results, M1 also revealed that the mobile number portability initiative by the regulators has been delayed by about 6 months. This in turn is likely to delay any competitive action by players to a later date. This could possibly explain the lower acquisition cost (down 5.7% QoQ) and retention cost (down 12.3% QoQ) incurred by M1 over the last quarter.
7.1 cents payout; maintain HOLD. In the 1H07, M1 has declared an interim dividend of 2.5 cents plus 4.6 cents coming from a capital reduction. The total payout of 7.1 cents translates to a payout ratio of 70% and investors will thus enjoy an interim yield of 3.3%. Finally in light of the better operating performance, M1 is also guiding a single-digit PATMI improvement versus previous guidance of a stable operation. We maintain our S$2.33 fair value and our HOLD rating.
M1 – BT
M1 posts 10% rise in Q2 net profit to $40.6 million
It aims to return 70% of $90.3m H1 net through capital reduction, dividend
MOBILEONE (M1) yesterday reported a 10 per cent year-on-year rise in second-quarter net profit to $40.6 million. This brought its first-half net earnings up 10.3 per cent to $90.3 million, 70 per cent of which the telco has proposed to return to shareholders through a dividend and a capital reduction.
The $40.6 million Q2 net profit translates to earnings per share (EPS) of 4.3 cents, up 16.2 per cent from 3.7 cents a year ago.
In a conference call yesterday evening, M1 chief executive Neil Montefiore attributed the better performance to higher revenues from increased data usage, as well as lower corporate taxes.
Q2 revenue grew 4 per cent to $199.8 million, helped by average revenue per post-paid user rising to $62.20 from $60.40 a year ago. This was driven by an increase in data usage by its post-paid customers, said Mr Montefiore. For H1, revenue rose 3.5 per cent to $396.2 million.
The company also brightened its outlook for the year by raising its profit forecast for the current financial year from stable to single-digit growth.
M1 proposed an interim dividend of 2.5 cents per share, and a cash distribution – by way of a capital reduction without any share cancellation – of 4.6 cents per share. Together, this will amount to 70 per cent of first-half net profit.
Mr Montefiore added that while M1’s wireless broadband service still constitutes a small portion of its customer base, it now has some 42,000 customers on the service, most of whom are on its $38 per month plan.
M1 added some 31,000 subscribers in the quarter, bringing its customer base to 1.409 million subscribers or about 28 per cent of the local market.
M1’s capex was $17.4 million in the first half of the current financial year, up from the $8 million spent in the same period last year. This was largely spent on its wireless broadband devices, said Mr Montefiore.
He added that with the growth seen in data usage, M1 is now evaluating technologies that will enable it to provide more of its own backhaul requirements.
‘Currently, we spend about $30 million per year on leased circuits that are not provided by ourselves,’ he said. This accounts for some 80-90 per cent of its backhaul requirement, most of which is leased from SingTel. M1 intends to reverse this, and by 2010 plans to have 80-90 per cent of its backhaul requirements self-provisioned.
M1 shares closed the day down 3 cents at $2.13. Shares of competitors StarHub lost 4 cents to finish at $2.86, while SingTel ended unchanged at $3.50.