M1 (M1 SP)
Share Price S$3.12
Target Price S$3.58
2Q13: Android Phones Hit Earnings But Attractive Dividends
M1 achieved strong growth in its mobile and fibre broadband businesses. Unfortunately, bottom line was affected by higher handset costs due to a shift towards Android-based smartphones. M1 remains our preferred pick for the telco sector due to its attractive valuation and sustainable dividend policy. Maintain BUY but lower target price to S$3.58.
• M1 reported net profit of S$39.2m for 2Q13 (+11.2% yoy), slightly below our expectations.
• Growth in mobile. M1 added 9,000 post-paid customers and grew postpaid subscriber base by 4.9% yoy, maintaining its market share. Postpaid ARPU increased 2% qoq to S$62.30 driven by adoption of tiered data plans. 26% of its post-paid subscriber base has migrated to tiered data plans, of which 15% exceeded their data bundle.
• Samsung S4 was launched in Apr 13, which caused a shift in the mix of handsets towards Android-based smartphones. 75% of handsets were Android-based in 2Q13 compared to only 50% in 1Q13. Costs of handset for Android-based smartphones were expensed off in entirety, resulting in a 4% qoq increase in costs of handsets. Thus, EBITDA margin contracted from 39.5% in 1Q13 to 37.1% in 2Q13.
• Continuing to expand fibre broadband. M1 added 7,000 fibre broadband customers to expand subscriber base to 67,000 in 2Q13. ARPU for fibre broadband was relatively stable at S$47.30.
• Lower gearing. M1’s net debt/EBITDA was only 0.6x in 2Q13 compared to 0.9x last year. It generated free cash flow of S$59m in 2Q13, slightly higher than S$55m in 1Q13.
• M1 declared an interim dividend of 6.8 S cents/share, representing a payout ratio of 78%.
• Anticipates moderate growth. Management guided moderate growth in earnings for 2013. Capex is expected to be S$130m, at the lower end of its previous guided range. M1 will invest S$85m to modernise its 3G network, including deploying a nation-wide 3G radio network on 900MHz frequency that enhances both indoor and outdoor coverage.
• Upcoming iPhone 6. Industry talk has it that the new iPhone 6 could be powered by a quad-core A7 and features iOS 7, which is a radical overhaul of the operating system. It provides gesture control, possibly including eye-tracking technologies. It comes with a Retina+ Sharp IGZO display with 1080-pixel full HD resolution. It has a 13-megapixel digital camera but will not have any home button.
• Apple is expected to provide iPhone 6 in various form factors, including 4.7-inch and 5.7-inch versions. Industry talk also has it that Apple will offer an updated iPhone 5S, followed by a brand new iPhone 6.
• Prospects for improvement in margins. M1 expects adoption of fibre broadband to accelerate in 2013. Management expects margins to improve as it approaches a critical scale of 100,000 subscribers.
• We have reduced our 2013 and 2014 net profit forecasts by 4% and 1.2% respectively due to higher costs of handsets with the shift in mix of handsets towards Android-based devices and higher traffic expenses for international call services.
• Our target price for M1 is S$3.58 based on DCF (required rate of return: 6.7%, terminal growth: 1.0%). Maintain BUY.
Share Price Catalyst
• Attractive dividend yield of 4.5%. Regular special dividend anticipated albeit at a smaller quantum.
• Continued addition of subscribers for fibre broadband services. Expansion of margins as base of subscribers reaches critical scale.
Source/Extract/Excerpts/来源/转贴/摘录: UOB Kay Hian research
Publish date: 17/07/13