M1 Limited - Not much to talk about (CIMB)

NEUTRAL Maintained

S$2.57 Target: S$2.63

Mkt.Cap: S$2,330m/US$1,914m

• Within expectations. Annualised, M1’s 1H11 results are within expectations, at 2% below our forecast and 1% above consensus. M1 declared a 6.6ct DPS for 2Q11, in line with our forecast. Highlights were slower revenue qoq due to lower handset sales and a qoq recovery in margins. We make no changes to our earnings forecasts for FY11-13 or DCF-based target price of S$2.63 (WACC: 8.5%). Maintain NEUTRAL as M1 lacks re-rating catalysts though downside should be limited by its dividend yields of 6-7%.

• Operating trends. 2Q11 revenue dropped 5% qoq due entirely to lower handset sales (-22.4% qoq) from lower sales volume. Revenue rose 10% yoy as 2Q10 was hit by a supply constraint for iPhones which had slowed handset sales. Service revenue, however, increased 2% qoq and 3% yoy, led by postpaid and growing contributions from fixed lines, both driven by an expanding subscriber base. EBITDA margins recovered by 2% pts qoq due primarily to lower handset costs and SACs but dropped 3.3% pts yoy due to higher handset costs from higher volumes.

• Fibre affected by low number of homes reached. M1 disclosed that NGNBN had passed 70% of homes but the number of homes reached was below 40%. The latter was attributed to the difficulty of obtaining access to condos and disagreements over who would bear the cost of pulling in fibre and lower awareness among heartlanders. M1’s fibre customer base doubled in 2Q from 1Q, to an estimated 10K from about 5K in 1Q. About 10k-12k subscribers come off contracts each month and it would take 1-2 years to address the entire base.

• Own OpCo. M1 will be launching its own corporate OpCo in 3Q11 to increase its competitiveness, offer customised solutions and lower its opex. Fixed margins should improve with the scale as it has to bear start-up costs now.

• Guidance kept. M1 has maintained its guidance of PAT growth for 2011. 1H11 growth of 7% yoy is fairly indicative of the full year and it is reasonable to assume the same run rates. We forecast yoy growth of 11% for 2011 PAT. M1 also keeps its 80% payout and would be monitoring the economy, its free cash flow, and gearing before deciding on any capital management.

Conference-call highlights

Smartphones reaching mass market. About 63% of its postpaid subscribers in 2Q11 possessed smartphones, up from 60% in 1Q11. More Android phones are now being sold due to more models available and at lower prices. It expects sales of iPad2 to rise in 3Q11 as it had limited stocks in 2Q11.

Opportunities in pay TV. A common set-top box for NGNBN is still about 12-18 months away. However, M1 believes that project NIMS (common set-top box) when introduced as well as recent cross-carriage regulations would open up opportunities in pay TV. This is because these two measures would unbundle content and may change customer behaviour as subscribers would watch content directly rather than sign on for an entire bundle. The measures would also address the customer base not previously addressed and there would be no need to pay for premium content.