SGX Yield Stock

Solid 1Q10

• Results in line. M1’s 1Q10 core profit was in line with our expectations but at the higher end of consensus at 25% and 26% of ours and market’s full year forecast respectively. As expected, no dividends were declared. M1 raised its FY10 net profit guidance, which does not surprise us. We tweak our FY10-12 core earnings forecast by 1.5-2.8% as we bump up our revenue and lower margin for higher handset sales and trim depreciation assumptions. However, our target is unchanged at S$2.26. We maintain TRADING BUY as we see M1 having the most capacity for capital management, the most upside from NGNBN and it would benefit over the long-term from the recent content carry regulation.

• Strong topline but flattish service revenue. As previewed, topline showed tremendous strength rising by 34% yoy and 15% qoq due to the full quarter impact of iPhone sales. Service revenue was fairly flattish qoq due to seasonally lower postpaid revenue which negated the higher prepaid revenue (from a larger base), higher IDD revenues (from higher traffic) and growth in fixed broadband revenue.

• Diluted margins. EBITDA margins declined by 5.7% pts qoq to 30.8% in 1Q10, the lowest in memory due to iPhone subsidies which pushed handset costs higher by 67% qoq. Subscriber acquisition cost rose to S$369, or 22% qoq, because of the subsidies but should peak in 1Q10. Service EBITDA margins fell by 1.6% pts qoq as higher handset costs were offset by lower traffic expense, leased circuit cost and advertising and promotional cost. Core profit rose by 8% yoy and 6% qoq due to lower depreciation as some components of the 2G assets were fully depreciated.

• Higher guidance. M1 raised its FY2010 net profit guidance from “comparable” to an improved earnings relative to 2009. We are not surprised and had highlighted its rather conservative guidance. The main drivers for the raised guidance are savings from commissioning its own backhaul, higher roaming revenue from a recovering economy, opening of the 2 new IRs and new revenue streams from its fixed broadband business. Our original FY10 core net profit was 5% above consensus.

No major surprises, forecasts maintained

• Headline 1Q10 net profit fall of 6% YoY to $39.3mil, is masked by a tax benefit in 1Q09 which lowered effective tax rate to 5%.

• Otherwise, results were in line with expectations on the back of a strong economic recovery. Pretax rose 9% YoY to $47.8mil.

• Mobile service revenues which account for 79% of total service revenues, grew 2% YoY to $143.3mil. With resumption of foreign worker influx, prepaid subscribers were a bigger growth contributor (+17% to 863,000) YoY basis. This helped offset 8% YoY fall in prepaid ARPU to $15.

• More encouraging is that postpaid net adds were a stronger 7,000/mth in 1Q10 (to 933,000), vs 5,700 for prepaid. M1’s launch of iPhones in December 2009 also helped

churn to fall to 1.4% from 1.6% in FY09. While postpaid ARPU of $59.7 maintained at 1Q09 level, this was a slight 2% decline from 4Q09.

• Uptake for M1’s fixed network services contributed $5.9mil revenues, an increase from $5.3mil in 4Q09 when its acquisition of Qala Singapore (renamed M1 Connect) was first consolidated. Despite the upcoming launch of NGNBN, management does not expect a big bang effect as about 20% of coverage will only be addressable in the early days.

• With M1’s recent launch of iPhones and rising demand for smartphones, handset sales surged almost four-fold YoY to account for 27% of total revenues. Typically handset sales account for 8% of total revenues.

• Sales of higher value-add phones bode well for data usage. M1 improved non-voice services to 29.8% of mobile service revenues in 1Q10. Separate data plan subscriptions doubled to 318,000 from 1Q09. M1 continues to upgrade its network in FY10 to achieve 42Mbps.

• Along with handset sales, handset subsidies surged, largely contributing to 42% jump in total expenses.

• Couple of bright spots at expense level: (1) cost savings from the completion of its backhaul network has started to come through with a 15% YoY fall in leased circuit cost to $11.2mil (2) fall in overall deprecation rate as some fixed assets have been fully depreciated.

• On balance, we are comfortable maintaining our forecasts. Stock is now trading at less than 15% upside to our fair value estimate of $2.29. We maintain HOLD rating.

• Dividend yield is also less compelling now at 6-7% p.a., after share price appreciation of 83% over the past 17 months since its low.

• To reflect the group’s strategy to develop from a predominantly mobile base to become a multi-service telecom provider, the group is changing its name from MobileOne Limited to M1 Limited.

Single-digit growth ahead + 6.5% yield

At a Glance

• 1Q09 net profit was above expectations mainly due to lower depreciation charges.

• Market may be disappointed, as M1 did not announce capital management. Management would review capital structure in 2Q10 though.

• Our FY10F/11F earnings are raised by 4%/7% on the back of upbeat guidance from management.

• Any share price weakness should be a buying opportunity. BUY with revised TP of S$2.28.

Core earnings growth of 8% yoy. 1Q10 net profit of S$39.3m (-6% yoy, +6% qoq) was better than our expectations of S$37m. Excluding one-off tax credit of S$5.5m in 1Q09, it represents 8% yoy core earnings growth in 1Q10. The quarter benefited from lower depreciation expenses of S$27.7m (-11% yoy, -16% qoq) as some assets had fully depreciated in 2009.

Improved market share for the fifth consecutive quarter. Mobile market share stood at 25.8% (versus 25.7% in 4Q09 & 25.2% in 1Q09) as prepaid mobile subscriber share improved while post-paid market share was stable. Churn rate declined significantly to 1.4% (1.6% in 4Q09 & 1Q09 each), lowest ever since introduction of mobile number portability in 2008.

Capital management disappointment. M1 did not announce capital management citing working capital requirements, which stood higher in 1Q10, potentially due to more iPhones sold under the “Take 3” program. M1 intends to review capital structure in 2Q10 after considering working capital requirements.

Growth prospects emerge for FY10F and beyond. Management guided for improvement in FY10F earnings compared to stable earnings guidance earlier. This could be attributed to lower depreciation charges. FY11F and FY12F earnings should benefit from (i) National Broadband Network launch in 2H10F and (ii) content-sharing regulations paving the way for its pay TV entry. Our TP is based on 13x FY10F PER (historical average 12x) due to better growth prospects.

M1 posts 6% dip in Q1 profit

Telco revises its earnings expectations for 2010 upwards

M1 LIMITED posted a 6 per cent year-on-year decline in net profit for the first quarter of this year, from $41.9 million to $39.3 million.

Excluding a tax adjustment that had boosted Q1 2009’s bottom line, M1’s net profit for Q1 2010 saw an increase of about 8 per cent.

Revenue for the quarter ended March 31 increased 33.6 per cent from $186.4 million to $249 million on the back of higher service revenue and handset sales.

Compared with Q4 2009, revenue grew 15.1 per cent, predominantly driven by handset sales.

Both postpaid and prepaid revenue increased in Q1, growing 1.3 per cent and 8.5 per cent year on year due to an expanding customer base.

For the quarter, M1 gained 38,000 customers, out of which 21,000 were postpaid customers and 17,000 were prepaid customers.

This took its customer base to 1.796 million as at end-March, an increase of 10.9 per cent year on year.

At end-February, M1’s market share held steady at 25.8 per cent, compared to 25.7 per cent in Q4 2009.

‘We expect data usage to continue to grow due to the take-up of smartphones,’ said Karen Kooi, chief executive officer of M1.

‘We are looking forward to the commercial launch of the Next Generation Nationwide Broadband Network and plan to offer a comprehensive suite of services for homes and offices. We will continue to upgrade our High-Speed Packet Access (HSPA) network to support downlink speed of up to 42Mbps by 2010 as well.’

In response to questions about its opinion on the allocation of the remaining 3G spectrum, M1’s chief technical officer Patrick Scodeller said: ‘We are in the process of replying to the Infocomm Development Authority of Singapore (IDA) and generally our view is that we would like some of the spectrum to support our growth in 3G.’

The IDA is currently seeking views from the telecom industry and the public about its proposal to free up its remaining 3G cellular spectrum and perhaps allow a fourth operator into the high-speed mobile services playing field.

The modernisation of its 2G network remains on track for completion in Q1 2011.

M1 also revised its expectations of earnings for the year upwards.

‘We are estimating full-year earnings as likely to improve compared to 2009,’ said Ms Kooi.

During the release of M1’s Q4 2009 results, the group had stated that it expected earnings in 2010 to be ‘comparable’ to 2009.

Earnings per share for the quarter fell 6.4 per cent from 4.7 cents to 4.4 cents, year on year.

The counter rose three cents in trading yesterday, to close at $2.14.