Rating: Buy (price target: S$3.75)
We expect a stable year for M1 in 2014, with steady growth in revenue (up 3% YoY) and a stable margin versus 2013, leading to 4% and 6% YoY increases in EBITDA and net profit, respectively. We expect DPS to grow 6% in 2014 to 15.1cents/share
Revenue: We expect M1’s strong mobile data growth momentum to continue in 2014, partly offset by declining voice revenue and lower international call services. On the fixedline side, we expect strong growth in fibre on low base, but M1’s pay TV business is still in too early a stage to make a meaningful impact.
Mobile data growth. We expect mobile data growth to continue to be the key growth driver for M1 in 2014. By Q3 FY13, 32% of post-paid subscribers were on tiered data plans, of which 16% exceeded their data bundle, bringing a 10% ARPU uplift. We expect the trend to continue, with up to 80% of M1’s mobile subscribers eventually migrating to 4G tiered-pricing plans. But the late adopters of tiered-pricing are likely to be more price-sensitive and the ARPU uplift will not be as much as from early adopters. On the other hand, the upside from tiered-pricing will be partly offset by: 1) lower roaming revenue; 2) ARPU dilution from bundling with fixed-line offerings.
Bundling strategy. Due to next generation broadband network (NGBN) rollout, M1 now has the ability to bundle mobile, fixed line, broadband and IPTV; a capability that was absent previously. We believe fibre broadband will gain more traction for M1 than pay TV in 2014 as M1's pay TV box is still in its infancy.
Margin: We expect a stable margin for M1 in 2014 at 38.5% (flat YoY). We expect an improving margin in mobile with better control on handset subsidies, however, the upside will be offset by margin dilution from the growing fixed-line business, as well as content costs in the longer term.
Capex: Management has maintained its 2013 full-year capex guidance of S$130m, and expects capex in 2014 will be at the same level as 2013 mainly due to LTE network rollout.
Positive catalysts: 1) better-than-expected traction in pay-TV take-up and bundled services; and 2) additional dividend yield given management’s commitment to shareholders’ return. Negative catalyst: slower-than-expected fixed-line business take-up, particularly in the corporate segment.
We have a Buy rating on M1 and price target of S$3.75. We derive our price target using a dividend discount model, which we believe is the appropriate methodology given its stable and predictable dividend stream. We assume a 4.25% cost of equity and 0.25% terminal growth rate