M1 (KE)

Event

M1’s net profit of $41.1m (+4.3% YoY) was within expectations but most encouraging is the way the pieces are falling in place for the group in the fixed broadband and Pay TV arenas. Growth potential is building up with the increase in public awareness of fibre broadband that has led to 80% of its broadband sign-ups being fibre-based, and M1’s plans to build its own OpCo that will enhance its competitiveness. Arguably, the group’s earnings are now being depressed by fixed network start-up costs.

Our View Encouraging signs of M1’s evolving business model were (1) more widespread adoption of fibre broadband leading to a 77% YoY (+9% QoQ) jump in fixed services revenue, and (2) continued growth in data ARPU, driven by higher usage of tablet computers. Management reported that 80% of its broadband sign-ups are now fibre-based, with 100Mbps the most popular connection speed. M1 is playing its cards well on several important fronts. Its OpCo will soon be available

for both corporate and residential customers, helping it to benefit from lower wholesale costs and faster time-to-market. In addition, the pay TV model will change from a content-centric one to one based on quality and cost of access, and customer service when the common set-top box is available, possibly in 2013. We do not expect a subsidy battle post-iPhone 4S launch this month, as smartphone penetration is already high and the new phone is not radically different from the old one. While SAC will likely rise in 4Q11 as it is traditionally the seasonal peak, we expect margins to be sustained. Similarly, we do not expect the loss of Vodafone to be damaging as M1 has been preparing for it for more than a year.

Action & Recommendation

Dividend yields are attractive at 6-7%, which should limit downside, while risks and challenges remain about the same as the previous quarter. However, with each quarter, the upside potential should become clearer. Maintain BUY.