SINGAPORE (Oct 16): DBS Group Research is maintaining M1 at “fully valued” with a target price of $1.49 given lower dividends on earnings decline as revenues come under pressure and costs escalate.

Dividend yield has been the most critical factor for M1’s stock price in the past. However, with M1’s FY18 dividend yield of 5.6%, coupled with potential annual earnings decline of 12% over FY17-19, the stock is not attractive compared to Singtel’s 5% yield with potential earnings CAGR of 3%, says analyst Sachin Mittal in a Monday report.

Mittal says M1 is seeing escalating costs as the company looks to expand its headcount. The carrier is also seeing higher project-related expenses. This has pushed down M1’s EBITDA in recent quarters. In addition, M1 is expected to pay $188 million for 700MHz spectrum when it is available which would push down earnings further, resulting in lower dividends, says Mittal.

In addition, M1’s new SIM-only plans could weigh down revenues on ARPU dilution although this could improve market share. The new SIM-only plans are 20-70% cheaper compared to M1's previous SIM-only plans while its new mySIM plans allow re-contracting subscribers to switch down and enjoy the same data allowances, albeit with lower voice and SMS allocation.

“With the ability to choose between older legacy heavy plans and cheaper data plans, we are likely to see M1’s subscribers looking to minimise their monthly rentals as they see fit,” says Mittal. This could result in at least a portion of the subscribers opting for lower-ARPU packages which would weigh on M1's revenues, 70% of which comes from mobile.

Meanwhile, Circles.Life success as an MVNO (Mobile Virtual Network Operator), on top of TPG’s entry in late 2018, further adds to the sector’s woes.

“Market is not paying enough attention to Circles.Life and the big divergence between M1’s EBITDA and earnings,” says Mittal, “Circles.Life in its short history of less than 12-months of operations seems to be doing well by virtue of its service delivery model and cheaper data pricing.”

“Weak 2H17 results even before the actual launch of operations by TPG expected in late 2018, could lead to further downward revision in consensus earnings and the valuation,” he adds.

Shares in M1 are down 2 cents at $1.80 or 10.7 times FY17 earnings.