M1 - Launch of LTE(CIMB)

NEUTRAL Maintained

S$2.52 Target: S$2.63

Mkt.Cap: S$2,284m/US$1,848m

Telecommunications - Mobile

“Soft launch” of LTE

M1’s “soft launch” of LTE is not expected to have much impact on either its revenue or costs given the limited coverage and devices on offer. Moreover, the cost of the dongles is not too hefty at this point. We view this launch more as a publicity campaign to drum up support as coverage is widened and more devices are available as M1 typically likes to be the first to launch new services. There should not be any issue over spectrum as it, together with StarHub, has the highest amount of 1800 MHz spectrum. This should be sufficient for M1 to cope with any upsurge in data traffic. We make no changes to our earnings forecasts, NEUTRAL rating or DCF-based target price of S$2.63 (WACC 8.5%). M1 remains our top Singapore telco pick.

The news

M1 has launched its Long Term Evolution (LTE) service to enterprise customers which would operate on the 1800 MHz and 2600 MHz bands with initial theoretical download speeds of 75 Mbps and upload speeds of 37.5 Mbps. By end-2012, download speeds will be upgraded to 150 Mbps and upload speeds to 75 Mbps.

The service will only be available to selected parts of the island within the financial district, including Marina Bay, Suntec, Shenton Way and others. Coverage will progressively be expanded to other areas and should be nationwide by 1Q12. The launch will only involve enterprise customers which will be able to access the service via USB modems on existing mobile broadband plans of S$59.40/month. An expanded range of devices including tablets and smartphones will be available later this year.

LTE is a mobile broadband standard widely regarded as a successor to 3G and is on the path to 4G. It is based on all-IP network and promises improvements in speed, network capacity, coverage, operating costs and user experience. The standard currently provides download peak rates of at least 100 Mbps with future developments potentially yielding speeds as fast as 300 Mbps while upload speeds should at least be 50 Mbps.

Comments

More of a soft launch. We view the announcement as more of a soft launch as it is only targeted at enterprise customers, LTE coverage is fairly limited and more devices will only be expected in the later part of the year (expected sometime in 3Q at the earliest). Nationwide coverage is only expected in 1Q12. We believe M1 is trying to drum up publicity ahead of a wider launch as it likes to be the first to launch services, having done so with HSDPA in Dec 06 and NGNBN in Sep 10.

Not much impact on revenue and costs. We do not expect major revenue contributions from the service as coverage and devices remain limited. Moreover, M1 has protected its ARPU at this stage by charging S$59.40/month, which is the equivalent pricing for its fastest mobile broadband plan of 21 Mbps. On the cost front, there is not expected to be a huge impact as take-up will not be that significant and cost per device is not too exorbitant.

Spectrum not an issue. LTE will consume the bulk of M1’s capex spending of S$100m this year, as guided in the past, although no exact quantum has been disclosed. A key prerequisite by IDA for the re-use of 1800 MHz and 2600 MHz is there should no degradation to the quality of the operators’ 2G services. This should not be a problem for M1 as it had purchased an additional 2x5 MHz of 1800 MHz in Mar 11 at a whopping cost of S$21.7m (54x the reserve price) and together with StarHub, has the most 1800 MHz spectrum. This should enable the operators to handle any upsurge in data traffic and any potential network congestion issues.

Valuation and recommendation

We make no adjustments to our earnings forecasts, DCF-based target price of S$2.63 (WACC: 8.5%) and NEUTRAL rating. M1 lacks catalysts though this is balanced by having the most upside from NGNBN and benefits from soaring inbound visitors. It also has the most scope for capital management. M1 remains our top pick in the Singapore telco sector.