WE are still in favour of a switch to M1. Following above-expectations Q2 2013 results, interim dividend was raised slightly but that is not the main reason to buy the stock. Instead, it is still early days to bet on M1 for (a) the greatest potential upside from 4G adoption, which we believe will happen faster and sooner than expected in 2013 and, (b) finally, the chance to monetise surging data usage in Singapore now that smartphone users have been weaned off the unlimited data bottle. The numbers in Q2 2013 results confirm what we saw in Q1 2013, and we maintain M1 as our strongest telco "buy" and raise our TP (discounted cash flow) to S$3.69.
Q2 2013 net profit rose 11 per cent to S$39.2 million, delivering on the promise we saw in Q1 2013 when we said that 2013 had the potential to be a good year for M1. H1 2013 net profit of S$80.2 million (+6 per cent/13 per cent y-o-y/ h-o-h) forms 47 per cent of our full year forecast but 50 per cent of consensus. We believe the street has been too conservative on M1's FY13 earnings and consensus will go up.
Management has maintained its guidance of moderate earnings growth this year. We are forecasting 15.5 per cent growth.
Service revenue continued on a tear, up 8.8 per cent y-o-y in Q2 2013 (+4 per cent in Q1 2013), on the back of great growth in the mobile sector - seeing positive y-o-y growth in postpaid ARPU (average revenue per user) again - and good growth in fibre (but still constrained and can do better). As expected, M1 is shaping up to be the biggest beneficiary of data monetisation because of its pure mobile earnings base.
In fact, Q2 2013 results could have been better if not for lower IDD (international direct dial) revenue.
4G subscribers on tiered plans jumped from 11 per cent of postpaid base in Q1 2013 to 15 per cent in Q2 2013 while the percentage of postpaid subs exceeding the bundled cap almost doubled q-o-q. About 11 per cent of the 4G users on tiered plans have upgraded to higher value plans, and the impact on ARPU is immediate. Q2 2013 postpaid ARPU rose to S$53.6 from S$52.9 on average in FY12. Average data usage rose steeply to 3.2GB from 2GB in just a quarter, suggesting that users are breaking free of the bundled cap.
Despite claims that the national fibre-optic network now has nationwide coverage, the real coverage is only about 30-40 per cent of all households as current connections are only into the MDF (main distribution frame) rooms of most buildings instead of directly into household units. As more customers exit contracts, the net-add pace should pick up beyond the current 7,000-8,000 per quarter. As such, fibre is another potentially positive catalyst. Despite its newness however, margins are now near optimal.
BUY
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