M1

DMG on 17 Jul 2012

M1 surprised on the downside with H1 FY12 results that missed the street and our estimates, no thanks to the accounting treatment for Android handsets, which clobbered Ebitda margin.

We cut our FY12/13 forecasts by 9-12 per cent post results to err on the conservative and downgrade the stock to "neutral", with a revised discounted-cash-flow fair value of $2.66. We are also moderating our dividend per share assumption for FY12 to 14 cents.

M1's core earnings, when annualised, were 12-16 per cent below our and consensus estimates. The key disappointment came from an accounting anomaly in the treatment of Android handsets which deviated from the usual fair value accounting it adopts for the iPhone (amortisation over the life of the contract).

M1 expensed upfront the cost of Android smartphones, which made up 70 per cent of all smartphones sold in Q2 2012. This hammered margins even as the subsidies on the models fell, as evident from the decline in subscriber acquisition cost (down 12 per cent q-o-q).

The telco estimates that 25 per cent of its total base comprises Android handsets versus 50 per cent for the Apple iPhone.

To our surprise, service revenue contracted 0.7 per cent q-o-q (up one per cent y-o-y), dragged down by weak IDD revenue (down 7 per cent q-o-q) and fixed services revenue (down 4.2 per cent q-o-q).

M1 said IDD sales were hit by the lower roaming revenue after Singapore and Malaysia signed a reciprocal agreement to lower roaming tariffs in 2011.

Despite booking in another $7 million in wholesale cost to expand its fibre footprint, its fixed service revenue was still down sequentially as there was a one-off sale of fixed equipment in Q1 2012.

M1 netted 7,000 fibre subs in Q1 2012 to 37,000, which translates into a fibre market share of some 21-23 per cent based on management's estimate.

M1 said it will introduce tiered data plans when its LTE service goes nationwide in Q3 2012 but did not provide any details.

Both M1 and StarHub have yet to respond to SingTel's earlier move to lower its data caps.

While M1 kept its dividend payout guidance at 80 per cent of earnings, it would appear that the absolute dividend for FY12 could potentially be lower due to the earnings impact arising from the accounting mismatch. Management was unable to provide guidance on whether this impact would stretch into H2 2012. We cut our FY12 and FY13 core earnings forecasts to $156.8 million and $187.7 million respectively from $177.4 million and $206.8 million previously to build in mid-term earnings pressure from the upfront expenses relating to Android handsets. Our DPS estimate is cut accordingly, although M1's dividend yield is still a decent 5 per cent, which should provide some share price support.
NEUTRAL