M1

Kim Eng on 17 Apr 2013

Upgrade to BUY. We recommend a switch to M1 from SingTel and StarHub. Dividend yield of 5% is decent but that is not the main reason to buy the stock. Instead, the relative underperformance of the stock this year vs. peers provides a chance to get in early on potential earnings upside from the adoption of 4G, which we believe will happen faster and sooner than expected in 2013. Already, the early numbers in the 1Q13 results are encouraging. We upgrade M1 to BUY with a DCF-derived target price of SGD3.55, the top end of consensus.

Tiered plan price hike to kick in this year. The SGD3/mth price hike since Sep 2012 when M1 switched from unlimited to tiered plans should have benefit postpaid ARPUs in FY13. M1 now charges SGD39/mth for 2GB of data, up from SGD36/mth for its previous 12GB plan. Previously, it had been the cheapest; now it is on par, befitting its superior 4G coverage. The number of postpaid subscribers that exceeded their data bundles has also doubled QoQ, which is a strong sign of a positive data monetisation trend.

Monetisation should kick in sooner than later. We believe M1 will benefit faster and sooner than expected from the higher data traffic and ARPU uplift that will come from (1) 4G adoption and (2) richer mobile content. In our view, 4G adoption will take place faster than 3G for the obvious reason that nobody can do without their smart devices anymore. Compared to 2009 when 3G first came into the picture, smartphones are now universally available (even 4G) and mobile content is a lot more richer and compelling.

M1 data biz already doing better than peers. M1’s mobile revenue growth has picked up steadily in 2012 on the back of its outperforming non-voice revenue, bucking the downward or flat trend of the other two operators. Given that this has been done without any significant increase in overall market share or ARPU, we believe that this could be due to M1 gaining market share in the 4G base, especially since the steepest jump in mobile revenue occurred in 4Q12, the quarter after it introduced 4G plans.

In-line with expectations. 1Q13 results (NPAT +1.8%/+8.8% YoY/QoQ to SGD41m) showed great promise for 2013 to be a good year. Service revenue rose 4% YoY, the fastest growth since 2010, on the back of good growth in both mobile and fibre businesses. The number of 4G customers on tiered plans jumped from 43k in 4Q12, its launch quarter, to 223k in 1Q13, just about 1% of its total postpaid subscribers but we expect rapid growth ahead in 2013 as M1 has the advantages of full island-wide coverage and a superior network.