M1 Limited - Still not cheap enough to take on the risk
- FY17F core EPS to fall 4.5% on higher subs retention cost and rising depreciation.
- Core EPS to fall by a total of 31% in FY17-20F, impacted by TPG’s entry.
- Despite high capex & spectrum fees, 80% payout ratio is sustainable in FY16-18F.
- Some risk for 700MHz in the general spectrum auction but largely manageable.
- Maintain Hold; target price cut by 9.5% to S$1.90. Good entry point is below S$1.56.
M1’s revenue and earnings outlook in FY17F
- We expect M1’s service revenue to be flat in FY17F.
- Mobile revenues should fall (-1.8%) due to lower international roaming/voice usage and negative effects from last year’s simonly plans and some downtrading activities. This will be offset by further growth in Fixed Services (+18.2%), driven by Enterprise contracts won at end-2016.
- EBITDA/core EPS could ease 1.1%/4.5% as we see higher retention cost to lock in mobile subs ahead of TPG’s entry in mid-2018 and rising depreciation on sustained high capex.
Earnings downhill in FY18-20F
- We forecast M1’s EBITDA to decline 14.8% (core EPS: -31.0%) in FY17-20F due to TPG’s entry.
- We are factoring in a 10% impact on mobile ARPU (base case), on top of the already sizeable ARPU erosion (post/prepaid: -10%/-27%) across FY15-17F due to incumbents’ new offers launched in 2016, positioning themselves ahead of TPG’s entry.
ARPU impact: what is a realistic range?
- Given the high degree of uncertainty, we have run a scenario analysis based on 5-15% ARPU impact across FY17-20F, which we believe is a realistic range.
- Assuming a 5%/15% ARPU impact (bull/bear case), we forecast M1’s EBITDA falling 6.7%/22.8% (core EPS: -16.5%/-45.4%) across the 3-year period.
- While a bigger impact is not impossible, an even more aggressive price undercutting from TPG could push EBITDA breakeven for its Singapore mobile business beyond 7 years, we estimate.
Capex to stay high; 80% payout sustainable but yields to decline
- We raise our capex assumptions for FY17/18F by 7-8% to S$140m/130m, as our recent meeting with M1 suggests continued fiber investments to drive the Enterprise Fixed Services business growth and meet its mobile backhaul needs. Despite this, chunky spectrum payments and competition threat, we expect M1 to maintain its 80% payout ratio in FY16-18 as net debt/EBITDA will rise to a peak of 1.5x at end-FY18F, then ease.
- Still, we see yields falling from 6.6% in FY16F to 4.4% by FY20F, in line with core EPS.
Assessing the risk from GSA
- The key risk from the general spectrum auction (GSA) will be the 700MHz, as TPG cannot bid for 900MHz, and 2500MHz is less valuable. However, this risk is partly mitigated by the regulator’s spectrum caps, which limits TPG’s bid to a max 2x5MHz.
- Our base case is M1 winning 2x15MHz for S$90m, or 50% above reserve price. If the final price is double/triple the reserve price, the impact to our DCF-based target price is - 1.2%/-3.7%, while net debt/EBITDA will peak at a manageable 1.6x/1.8x at end-FY18.
Maintain Hold; entry point is below S$1.56
- We adjust our FY16F/17F/18F EBITDA by +1.3/-3.7%/+2.3% (core EPS: +2.1%/-6.5%/ +4.4%), due to higher handset subsidies and ARPU erosion in FY17 and 6-month delay to TPG’s launch in FY18.
- Including higher capex, we cut M1’s DCF-based target price by 9.5% to S$1.90 and maintain Hold.
- A good entry point would be below our bear case fair value of S$1.56 and exit point above our bull case fair value of S$2.18.
- Upside/ downside risks are better-/worse- than-expected impact of TPG’s entry.