Analysts keep M1 at 'hold' as headwinds from TPG's impending entry stay strong
SINGAPORE (Apr 17): M1 reported a 0.9% rise in 1Q18 earnings to $34.1 million compared to $33.8 million in 1Q17.
Operating revenue rose 0.5% to $254.1 million from $252.8 million, with service revenue increasing 3.0% to $184.7 million, driven by higher fixed services and postpaid revenues with the growing corporate and government segment contributed 37% of service revenue.
Following the results announcement, RHB is maintaining its “neutral” call on M1 with a target price of $1.95.
Despite the group’s financial numbers facing distortion by the implementation of SFRS 15 from Jan 1, its results still were broadly in line with expectations.
Revenue from fixed services was 14% up y-o-y, driven by 5,000 net-additions in its fibre customer base, as well as steady ARPU of $43.70. Fixed services remained the second largest contributor to service revenue, after mobile services, at 17% in 1Q18.
In a Tuesday report, RHB says, “Capex reaffirmed at $120 million for FY18, with major project-related capex already incurred in FY17. We view this as providing some headroom for dividends, where the payout guidance has been maintained at 80%.”
Similarly, CIMB is reiterating its “hold” call on M1 with a target price of $1.85.
Revenue from mobile services rose 2.5% y-o-y and accounted for 76% of the total service revenue, mainly due to postpaid revenue, which rose 4.3% y-o-y, driven by subs growth in higher-end plans and greater contribution from Circles.Life (CL).
Prepaid revenue fell by a steeper 11.1% y-o-y from keener competition as its competitors gave retailers costly incentives to acquire subs. However, prepaid subs declined 59,000 q-o-q while postpaid net adds rose a healthy 12,000 q-o-q.
In a Tuesday report, analyst Foong Choong Chen says, “A good entry point would be below $1.50 (bear case), and a good exit point above $2.10 (bull case).”
DBS is also keeping its “hold” rating on M1 with a target price of $1.76.
Going forward, M1 plans to scale up infocomm technology (ICT) capabilities and solutions over connectivity, to capture opportunities in Internet of Things (IoT), cloud computing, data analytics, cyber security, and Fintech and Smart Nation initiatives.
In a Tuesday report, analyst Sachin Mittal projects fixed services & IoT to contribute about 30% of service revenue in FY20F, reducing the drag on revenues from the entry of TPG.
TPG aims to commence operations in Singapore in 2H18 and Mittal believes that any potential competitive action by TPG, such as handset subsidies to poach subscribers could negatively affect M1’s stock price.
Likewise, OCBC is maintaining its “hold” recommendation on M1 with a fair value estimate of $1.70.
In a Tuesday report, analyst Eugene Chua says, “Looking ahead, M1 remains open to partner more mobile virtual network operators (MVNOs) to address niche segments, and we believe its partnership with Circles.Life is gaining good traction.”
Apart from the retail market, the group will continue to build its foundation to prepare for future demand-driven 5G network roll-out.
In addition, the analyst expects the group to continue to clinch and deliver fixed services opportunities in the corporate and government segment.
“We believe headwinds remain strong given the impending entry of TPG in Singapore,” says Chua.
Meanwhile, Maybank is also reiterating its “hold” recommendation with a target price of $1.63.
In a Tuesday report, analyst Luis Hilado says, “Despite some variances due to implementation of new contract accounting standards, we believe M1’s 1Q18 results were in line with low expectations (ours and consensus).”
Increasing competition in the wireless space is likely to constrain the operational and share price performances.
“With the number of competitors increasing over the next 12-18 months we cannot discount the risk to our base-case scenario of gradual revenue erosion for M1,” adds Hilado.
The analyst prefers Singtel as it has a more regionally diversified structure.
As at 11.20am, shares in M1 are trading 3 cents higher at $1.82, or 3.7 times FY18 book with a dividend yield of 6.1%.
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