M1 LIMITED
B2F.SI
M1 Limited - Negatives are priced in but uncertainty lingers
The stock has declined 35% from its peak in April 2015.
- The stock has declined in anticipation of the potential entry of a 4th mobile player. The winner could be announced by the end of 1Q16 while actual operations may start from 2Q17 onwards.
- M1 is cheap at 13.6x FY16F PE versus 16x for StarHub as it has
- a more price-sensitive user base;
- lesser number of subscribers on bundled offerings; and
- larger exposure to the mobile sector as a percentage of revenue.
- Conversely, if there is no 4th telco entry, M1 could benefit the most.
Lower dividends than last year.
- 4Q15 net profit of S$43.6m (- 2.1% y-o-y) was in line. However, final DPS of 8.3 Scts (-30% y-o-y) was below expectations.
- FY15 dividend payout ratio stands at 80% versus 100% in FY14 as M1 wants to reserve cash for upcoming spectrum auction.
- Besides, we want to highlight that fixed service revenue grew 29% y-o-y in 4Q15 and made up 12% of the total service revenue.
Our bear-case TP is S$2.20 while bull-case TP is S$3.40.
- Our base-case TP of S$2.60 assumes 10% adverse impact on M1’s revenue due to the 4th player in 2022, with EBIT margins falling to 16% versus 20% currently.
- Under our bear-case scenario, we assume a 12% adverse impact on revenue in 2022 with EBIT margins dropping to 15%. Our bear-case TP is S$2.20.
- Under our bull-case scenario, we assume that there is no 4th telco entry and no adverse impact on M1’s revenue in 2022 although EBIT margins may slip to 19%. Our bull-case TP is S$3.40.
Valuation:
- No changes to our DCF (WACC 6.8%, terminal growth 0%) based TP of S$2.60.
- Upgrade to HOLD.
Key Risks to Our View:
- Non-entry of a 4th mobile player could lead to a relief rally.
- MyRepublic has completed a funding round to raise S$23m in Sep-15 which is not adequate for network rollout of US$250m- 300m.
Sachin Mittal
DBS Vickers
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http://www.dbsvickers.com/
2016-01-19
DBS Vickers
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