SGX Yield Stock

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.

Margins holding up in 3Q13

• Sales slightly below expectation
  
• Sees moderate NPAT growth
  
• Raising FV to S$3.17
  

Margin holding up in 3Q13

M1 Ltd reported its 3Q13 revenue of S$241.7m, down 5% YoY and 1.1% QoQ, mainly due to lower handset sales (down 28% YoY, down 6.5% QoQ) as the launch of the new iPhone 5 models and the Samsung Note 3 were at the tail-end of the quarter. But as a result of this (and lower handset subsidies), service EBITDA margin improved to 38% from 37% in 2Q13 and 36% in 3Q12. Net profit also climbed 19% YoY and 1% QoQ to S$39.5m. 9M13 revenue was down 2.7% at S$729.3m, meeting around 64% of our FY13 forecast, while net profit rose 10% to S$119.7m, or 77% of our full-year estimate.

Keeping guidance unchanged

Going forward, management has kept its 2013 guidance intact i.e. still expects to see moderate earnings growth, driven by the continued migration of customers to the tiered pricing plans. M1 notes that some 32% are already on these plans where 16% has exceeded their data bundle, resulting in a 10% ARPU boost (but this is mitigated by lower roaming revenue). M1 has also kept its capex spend at S$130m (also expects similar amount next year as some upgrading projects are likely to spill over into 2014). Management also expects some growth from its internet TV service – MiBox . While M1 says the take-up is encouraging, it did not give any numbers. Nevertheless, the telco revealed that it could be eligible for crosscarriage of content by mid-2014.

Maintain HOLD with new S$3.17 fair value

In light of the 9M13 results, we opt to pare our FY13 sales estimate by 8%; but we keep our earnings estimate unchanged. Our DCFbased fair value inches up to S$3.17 from S$3.10 on slightly lower risk-free rate assumptions. Maintain HOLD.

Dialing Up Decent Numbers

M1’s results were in line. The stronger take-up of tiered data plans is positive although effective ARPU accretion is still capped by roaming revenue weakness. We expect higher SAC to crimp 4Q13 EBITDA margin. Our forecast and NEUTRAL rating on the stock remain unchanged as with our FV of SGD3.25 (9% WACC). M1 remains our top telco pick on relatively cheaper valuations versus its local peers.

In line. M1’s 9MFY13 core earnings made up 74% and 75% of our and consensus estimates respectively. 3Q13 service revenue growth of 5.4% brought cumulative service revenue growth to 6.1%- in line with our expectations. The lower handset and A&P led to decent EBITDA and net profit growth of 6.4% and 9.7% respectively YTD.

EBITDA margin held up but should fall in 4Q13 due to the launch of the iPhone 5s/5c and the Samsung Note 3 in late September. Subscriber acquisition cost (SAC) fell 2% q-o-q as customers held back their purchases in anticipation of the launch.

Decent demand for MiBox. M1 disclosed that slightly <70% of the Android set-top box (launched in 3Q13) sold is bundled with its fiber offering. It hopes to qualify for content cross- carriage by mid-2014 when the number of pay-TV subscribers hit the 10k mark for eligibility.

Roaming weakness puts pressure on APRU despite higher take-up of tiered plans. The percentage of postpaid customers on its tiered data plans widened to 32% from 27.5% in 2Q13 (4% in 3Q12). While M1 said it continued to witness good ARPU uplift (+10% on 3G ARPU) from subscribers ‘tiering-up’, roaming revenue pressure has nonetheless cap effective ARPU accretion.

Maintain NEUTRAL, FV of SGD3.25. There is no change to our forecast with management reaffirming its profit guidance for the full year of ‘moderate growth’. Management said the recent penalty imposed by the IDA of SGD1.5m for network disruption earlier this year has been factored into its guidance. M1’s capex should remain elevated in the December quarter (YTD: SGD79m) with tail-end spending on network enhancements.