M1 (KimEng)

Event:
By now, it should be clear that the “sell in May and go away” cliché has taken strong hold of the market as the last reporting season did not give any scope for upgrades, either in forecasts or recommendations. If anything, most companies flagged rising costs this year as the biggest stumbling block to growth. In such times, we believe investors should stick close to defensive stocks such as M1. A 100% dividend payout will translate to a highly attractive yield of 7%. BUY.

Our View:
For FY11, we think M1 will have the added catalyst of a possible dividend encore. Last year, it paid out 100% of its earnings, adding a special dividend of 3.5 cents a share on top of the ordinary dividend of 7.7 cents a share. Looking at capex trends, we believe it is possible that the company may follow up with a similar payout this year, and upgrade our dividend forecast for FY11 from 14.5 cents to 18 cents, assuming a 100% payout ratio against the typical 80%.

M1’s Long Term Evolution (LTE) network – Singapore’s first 4G high-speed (300Mbps) wireless network – will be fully deployed by 1Q12. While a major item, this has always been part of M1’s upgrading plans. Therefore, we do not expect 2011 capex to stray beyond guidance of $100m. With just $12m capex in 1Q11, we believe capex for the rest of the year should stay similarly tame. This should enhance M1’s ability to pay more dividends.

Unlike previous years when subscriber acquisition subsidies shot up due to Apple’s new iPhones, such costs should not be a concern this year with the proliferation of non-Apple products. Although costs are likely to rise in 2H11 as M1 ramps up its NGNBN-related sales activities, most of them will be variable in nature. In fact, as it cuts more traffic to its own backhaul transmission network this year, higher sales costs should be mitigated by lower leased circuit costs.

Action & Recommendation:
Maintain BUY with a target price of $2.88, based on 16x FY11F earnings.