Circles.Life deal gives M1 competitive edge for now, but TPG entry remains a threat

Circles.Life deal gives M1 competitive edge for now, but TPG entry remains a threat

By: 
Michelle Zhu
05/07/18, 12:08 pm

SINGAPORE (July 5): Maybank Kim Eng is maintaining its “hold” call on M1 with an unchanged price target of $1.63 cents on the belief that expected earnings pressure on the group has been largely priced in by the market.

The research house forecasts a 3% CAGR decline in wireless service revenues over 2017-20E.

In a Monday report, analyst Luis Hilado says M1’s head start in securing a mobile virtual network operator (MVNO) leasing deal with Circles.Life has, and will, enable the telco to temper wireless revenue pressure relative to competitors going forward.

“Although M1 does not break out its MVNO leasing revenues separately, it is likely that being the first incumbent to capitalise on an MVNO arrangement has driven its industry outperforming wireless service growth in 2017,” notes Hilado.

While the analyst expects some of M1’s competitive edge to be taken off by other telcos which have since entered into MVNO leasing contracts, he highlights M1’s contract with Circles.Life as a volume-based one, which he expects to result in volume uptick and at least initially be beneficial to the MVNO deal – although whether it impacts the core business remains a risk.

“Arguably, enabling the first real low price competitor into the market may have precipitated industry revenue pressure and may be setting the price bar lower prior to TPG’s 2H18 launch. Nonetheless, the move coupled with a new focus on the enterprise market has shown to have relatively paid off for the telco,” he adds.

As such, Hilado’s 2018E forecasts remain largely in line with FactSet consensus’ $130 million core profit estimate at $128 million, but assumes a heftier drag in 2019E ($94 million) with the full year impact of TPG’s entry, compared to the consensus of $110 million.  

“We believe that M1’s successful strategy of biting the bullet with its Circles’ MVNO deal will continue to provide a relative benefit in the increasingly competitive wireless sector… The degree of aggressiveness of TPG and the incumbents’ reaction is the key risk or upside to our outlook,” he concludes.

Shares in M1 were trading 1 cent lower at $1.57 before the midday break.

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