M1 (KimEng)

Event

The results are within expectations. M1’s 1H11 net profit rose 6.6% to $85.4m, or 52% of our full-year forecast. It was encouraging to see fixed network sales jump 41% QoQ as this is a key reason for our bullishness on M1. The number of fibre broadband subscribers doubled from 1Q11. Also, mobile data usage is expected to be a potent earnings driver and as the first telco to roll out LTE (Long Term Evolution), M1 is all set to benefit as it races to be the first to cover the whole nation by 1Q12.

Our View:

While M1 did not disclose its fibre subscriber base, it did say fibre subs doubled QoQ. We believe this still underestimates the potential size of the market as home reach (cable terminates in home) still lags behind home pass (cable terminates in building) which has reached 70% of Singapore. By our estimates, fixed revenue could start to become sizeable by next year, at a forecast 6% of group revenue.

SAC fell further to $296 and should remain tame now that the heavily-subsidised iPhone has fallen to below 50% of incremental sales (from as high as 80% previously). Even if the new phone bears a radically new form factor, we reckon enough alternative OS choices exist (eg, Android) such that SAC should not be as skewed as in the past by the iPhone. iPhone 5 is expected to be launched in the US in 3Q11.

We expect increased data usage, driven by higher penetration of smartphones (63% of M1’s postpaid base) and tablet computers, to be a key catalyst in 2011-12. LTE could surprise on the upside, as unlike early 3G days when adoption was held back by a lack of devices, LTE dongles are already available and more terminals (ie, handsets) are expected to hit the market by year-end.

Action & Recommendation

Maintain BUY. M1 remains our top telco pick in Singapore. We raise our target price to $2.95 (from $2.88) on slightly more adventurous assumptions for fixed network.