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M1 put on 'hold' given strong competition ahead

Samantha Chiew
Samantha Chiew • 3 min read
M1 put on 'hold' given strong competition ahead
SINGAPORE (Jan 24): M1 on Tuesday reported a 2.5% drop in 4Q17 earnings to $31 million from a year ago, dragged down by lower handset sales.
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SINGAPORE (Jan 24): M1 on Tuesday reported a 2.5% drop in 4Q17 earnings to $31 million from a year ago, dragged down by lower handset sales.

Operating revenue for the quarter came in at $307.2 million, 2.1% lower compared to $313.9 million last year.

See: M1 posts 2.5% drop in 4Q earnings to $31 mil on lower handset sales

RHB has continued to rate M1 “neutral” with a target price of $1.95.

In a Wednesday report, RHB says, “The telco remains the most susceptible to competition, given its larger mobile exposure and the bigger proportion of lower average revenue per user (ARPU) customers.”

In addition, M1 has expanded the scope of the infrastructure sharing agreement with StarHub to include the joint upgrade of 4.5G indoor antenna systems for large buildings.

“While details are sparse, we think the arrangement could contribute to further savings in capex/opex in the medium to longer term on top of the 20-30% projected from active network sharing,” says RHB.

M1 also continues to benefit from Circles.Life – its key mobile virtual network operator (MVNO) customer – which has been gaining share at the lower end of the market with its attractive single SIM-only plan.

DBS is also maintaining its “fully valued” rating on M1 with a target price of $1.49.

In a Wednesday report, analyst Sachin Mittal says, “We expect its local peers to react to these cheaper plans or risk losing market share to M1.”

Circles.Life’s success as an MVNO and the entry of MyRepublic in early 2018 is likely to stir up competition in the low-end segment, where M1 is dominant, causing further disruption to earnings and dividends.

The analyst predicts that this will cause M1’s EBITDA to continue contracting at an annual rate of 3.0% in FY17-20 with earnings declining at an annual rate of 12%.

Hence, this should negatively impact the group’s dividend payment – set at 80% earnings – as well as its share price.

“The carrier is also seeing higher project related expenses in the enterprise segment. This has pushed down M1’s EBITDA in the recent quarters and would likely be further exacerbated by a rise in depreciation and amortisation costs as M1 invests on network assets and spectrum,” says Mittal.

Similarly, OCBC is sticking to its “hold” call on M1 with an increased estimated fair value of $1.70.

Looking ahead to FY18, M1 guided for capex to be about $120 million, compared to $151 million in FY17, and intends to maintain its 80% payout ratio dividend policy.

In a Wednesday report, analyst Eugene Chua says, “We expect M1 to continue to deliver the multi-year corporate fixed services projects, while working to clinch new ones.”

In addition, M1 has also said it will continue to scale up its ICT capabilities and solutions over connectivity to capture opportunities relating IoT and Smart Nation initiatives.

With all things considered, including the impending entry of new competitors – TPG and MVNOs – the analyst expects the group’s earnings to bottom-out only in FY19.

As at 12.16pm, shares in M1 are trading at $1.87 or 15.4 times FY18 earnings with a dividend yield of 5.2%.

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