M1

Kim Eng on 17 Jan 2012

Below expectations. M1 reported full-year net profit of $164.3m, up 4.5% YoY, but below our forecast of $166.5m and consensus of $168m. In line with the trend in the past years, 4Q11 net profit of $37.5m was down 9% QoQ due mainly to seasonal factors. Dividends disappointed. Final DPS of $0.079 was higher than 2010’s $0.077 but M1 refrained from repeating 2010’s special dividend of $0.035 due to macroeconomic concerns.

Margins pressured by iPhone 4S. Strong demand for the new iPhone and other seasonal promotions depressed EBITDA margin to 39.1% in 4Q11, down 2.2ppt YoY and 3ppt QoQ. Subscriber acquisition costs (SAC) soared to $423 per postpaid customer, up 15% YoY and 48% QoQ. Arguably, 3Q11 SAC was depressed by anticipation of the new iPhone, ie, higher mix of lower subsidy non-iPhone models. However, management does not expect SAC to stay high going into 1Q12.

Expect stable results in 2012 but lower dividends. We have cut our FY12 forecast by 8% and pushed back growth assumptions by a year on the premise that there will be a recession in 2012. Similarly, dividend expectations are now more muted than before. Although net debt/EBITDA target is still 1-1.5x (4Q11: 0.9x), the lower end of the range is more likely. Capex was also guided up to $110-130m but the wide range makes it a likely conservative estimate. There may be scope for savings.

Roaming already falling, NGNBN benefits overstated. M1 has already started to experience declining roaming revenue in 4Q11 as travellers become more cost conscious. The economic slowdown and exit from the Vodafone roaming partnership from this month could also cost it. Although NGNBN should reach 95% coverage by mid-2012 and fibre adoption should continue to gain pace, M1 is handicapped by the lack of LTE handsets and its limited reach into homes and businesses.

Downgrade to Hold. At 14x FY12F PER, M1 is not expensive and yield of 5.6% is still relatively supportive. However, the lack of growth, lower dividend expectations and more muted NGNBN benefits suggest a lack of catalysts. Our revised target price of $2.35 is based on 13x FY12 forecast, in line with its long-term mean. Prefer StarHub.