M1: Pushing The NGNBN Boundaries (DMG)

(BUY, S$2.57, TP S$2.85)

There were no surprises in M1’s 1HFY11 results with an expected interim DPS of 6.6cents/share declared (payable on 11 Aug). The main highlights from the results call were the doubling of NGNBN customers QoQ even as the protracted rollout issues continued and the change in sales mix of handsets which pulled down device cost sharply. We keep our forecast which assumes core profit growth of 8-10% for FY11/12, underpinned by relatively stable margins and progressively stronger NGNBN contribution from FY12. M1 remains a BUY on NGNBN and dividend upsides.

In line. M1’s core profit of S$81.5m, stripping-out forex gain of S$4m in 1HFY11 was in line with our/consensus, at 48% of full year forecasts. While service revenue grew 2.1% QoQ from the low base in the preceding quarter, overall revenue still fell 5% QoQ (+10% YoY) as handset sales slipped 22.3%. Consequently, the 13% sequential decline in handset cost (due to the change in the type of handsets sold and buyers leaning towards Android models) and stable A&P contributed to the steady EBITDA margin QoQ of 42%. M1 said it had limited stocks of the new iPad2, launched in May with the positive impact only felt from 3QFY11. In tandem with the higher wholesale cost for fixed services, fixed services revenue expanded 41% QoQ, making-up 4% of overall revenue.

LTE and NGN updates. We understand from management that the number of homes passed for NGNBN has reached 70% (target 95% by 2012) although the percentage of actual access to homes is merely 40% owing to operational and administrative impediments. M1’s NGNBN customer base has nonetheless doubled QoQ. While it was the first in South East Asia to launch LTE (see our note dated 21 June), M1 expects take-up to improve with at least 2 LTE devices set to be introduced by HTC and ZTE later this year and blanket coverage from 1Q2012. M1 targets to launch its own NGN Opco in 3QFY11 which it views as an avenue to strengthen its enterprise offering and allowing it to lower the cost of rollout.

Best of breed- dividend upside potential and a pure play on NGN. We make no change to our forecast noting that management expects the underlying revenue growth trend in 1HFY11 to continue and has reaffirmed its previous FY11 guidance (earnings to grow from FY10/capex of S$100m including LTE and 80% dividend payout). M1’s recurring dividend yield of 6% makes it a defensive bet under prevailing market conditions with stock re-rating catalysts coming from: (i)the higher take-up of NGNBN services; and (ii) potential for further capital management. Maintain BUY based on DCF derived fair value of S$2.85.