M1

Kim Eng on 17 Apr 2012

2012’s opening quarter within expectations. M1 opened 2012 with all the signals intact and pointing in the right direction, namely that greater visibility is being gained on its future margin and topline drivers. While net profit rise of 7.5% QoQ to $40.3m is inline with market expectations, we also saw extremely positive YoY trends. Notably, there are very encouraging signs of an earlier-than-expected ability to monetise its data business. Further, as rollout issues are increasingly resolved, we expect greater gains in fibre subscriber base in the quarters ahead to be another positive catalyst for the stock.

Positive trends for data monetisation ahead. Data revenue continued to outpace voice. In 1Q12, M1 saw 36.9% of service revenue coming from data, up from 36.2% in 4Q11 and 34.7% in 1Q11. As a result, its data ARPU also ticked up for the fourth straight quarter in 1Q12. In addition, management reported that revenue per gigabyte of data consumption has improved. This positions M1 well for more effective data monetisation in future.

NGNBN issues on the way to resolution. The government has finally stepped in to force OpenNet to be more responsive to market needs. As OpenNet increases installation capacity and better handles demand fluctuations, we anticipate faster growth in fibre net-adds this year. M1 added 7,000 fibre subscribers in 1Q12 to 29,000, still below the optimal level of 80,000-100,000, but this could rise very fast as bottlenecks are worked out and the public becomes more aware of the benefits.

Margins should improve further as fibre takeup rises. As expected, handset sales retreated from 4Q11’s high, which saw EBITDA margin sequentially improved to 40.1% (4Q11: 39.1%, 1Q11: 42.2%). While this was due to a change in device mix toward Android-based devices, we expect launches of more non-iPhone handsets in the next few quarters and better economies-of-scale in the fibre fixed services business to drive further improvement in margins.

Gaining greater clarity. We believe M1’s outlook is clearing up as greater visibility is gained on its margin and topline drivers. BUY with TP of $2.85 (including DPS of $0.145) for a total return of 17%.