(Aug 7): Since July 18 — when M1 announced that majority shareholders Singapore Press Holdings (SPH), Keppel Telecommunications & Transportation (KT&T) and Axiata Group had shelved a strategic review of their collective stake — shares of the telco have declined 12.51%.

Having outperformed its peers Singapore Telecommunications and StarHub since March this year, M1 is no longer the favourite. Year-to-date, the stock is down 8.9%. Singtel’s shares are up 5.8% and StarHub’s down 3.6%.

At least two analysts have downgraded their calls on the stock and Bloomberg data now shows an overwhelming 12 “sell” calls, against three “buy” and seven “hold” calls. If the company hopes to turn the negative sentiment, it will need to find a new source of growth.

The loss of a potential buyout offer has done much to damage investor interest in M1’s shares.

But the company’s real difficulty is its declining dividend potential. On July 18, M1 had also announced its results for 2QFY2017 ended June.

The company, long a favourite for its sizeable dividend yield, is paying out an interim dividend of just 5.2 cents a share. That is 25.7% less than the seven cents it has been regularly paying out as an interim dividend since 2014.

Some analysts think the company’s dividend may continue to fall. Sachin Mittal, an analyst at DBS Group Research, is expecting M1’s net dividend per share to fall from 12.9 cents last year to 11 cents this year, 9.96 cents next year and 8.45 cents in 2019. At 8.45 cents, Mittal projects a net dividend yield of just 4%.

“Earnings, and hence dividends, are set to decline sharply in FY2019 [ending December], owing to the high price tag of $188 million for the 700MHz spectrum,” says Mittal in a July 19 report.

Earlier this year, M1 had bid for and secured the spectrum at a government auction. High amortisation costs for the spectrum would impact earnings, which Mittal says could have an impact on dividends. For FY2017, M1 aims to pay out 80% of its earnings as dividends.

Mittal has downgraded his call on M1 to “fully valued” from “buy”. He has lowered his price target to $1.78, from $2.54 previously.

Meanwhile, OCBC Investment Research has downgraded its call to a “sell” from a “hold”.

The brokerage’s new price target is $1.75, versus $1.96 previously. OCBC is projecting M1’s dividend yield to fall to 5.5% by 2018 as it expects earnings to fall to $131.3 million from $149.7 million last year.

“We expect the competitive landscape to worsen with TPG Telecom’s entry and also with MyRepublic’s intent to launch mobile services as a mobile virtual network operator [MVNO] in Singapore,” OCBC says.

Australia’s TPG has won the rights to launch a fourth mobile network operator here and is expected to begin operations next year. MyRepublic, a broadband services provider, recently announced its intentions to enter the mobile market as an MVNO, which leases capacity from MNOs rather than owning its own infrastructure.

Mobile no longer a money spinner As an owner of mobile infrastructure with a customer base of about two million mobile subscribers, M1 is in no immediate danger.

In 1HFY2017, the telco generated $108.2 million in net cash flows from operating activities — more than sufficient to support dividend payments.

But the business of telecommunications is changing, and if M1 wants to keep investors happy, it has to change too. Although customers are more addicted to their phones than ever, they are not spending more money with the telcos.

The number of postpaid mobile customers on tiered data plans has increased to 79% in 2QFY2017, from 75% in 2QFY2016. And the percentage of those customers exceeding their primary data bundles has increased to 32%, from 25% previously.

However, the average revenue per user for the postpaid segment (excluding revenue allocated to handset sales) has declined from $51.60 to $48.50.

Poopalasingam Subramaniam, M1’s chief marketing officer, says the growth in data usage is being offset by declines in other mobile services.

“While we’re seeing a healthy growth in the use of data, I think a part of this is being offset by the decline in roaming IDD, and to some extent messaging and voice,” he says on the company’s recent earnings call. Revenue from international call services declined 9.6% in 1HFY2017 to $28 million.

The trend of declining mobile revenue seems unlikely to reverse. Even as data demand rises, the local telcos have been unwilling to raise or even maintain their data prices. All three have rolled out packages that allow customers to upsize their data allowances at progressively lower rates.

Also, they are making it cheaper for customers to use mobile data overseas.

That ought to mean higher revenues, but M1’s latest set of numbers suggests that is not the case.

Customers are possibly downgrading their mobile plans — as they do not need as many voice minutes — and then paying a small fee to increase their data allowances.

According to M1’s website, a $102 monthly subscription will give you 800 voice minutes and 7GB of data. For $62, however, customers can get 300 voice minutes and 4GB of data. An additional 3GB of data would then cost just $5.90 more.

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Looking for growth The one segment of M1’s business that is growing is fixed services, which supplies fibre broadband connectivity to both the corporate and residential markets.

For 1HFY2017, revenue from fixed services increased 22.3% y-o-y to $61 million. This number includes revenue from solutions that M1 sells to its corporate customers, such as cyber security solutions and data centre solutions. M1’s fibre customer base grew by 8,000 q-o-q to 176,000.

M1 appears to expect this segment of business to drive its growth. In its earnings release, M1’s CEO Karen Kooi says: “We have been investing in narrowband Internet of Things [NB-IoT] network and digital solutions, and expanded our offerings to include managed infrastructure services, cyber security, business solutions and analytics. This would enable us to better serve our customers and generate new revenue streams for future growth.”

NB-IoT is a low-power wide area network radio technology standard developed to connect devices and services. Possible applications include smart power meters that send readings directly to a billing database and smart streetlights that automatically adjust to ambient light. A nationwide NB-IoT network will be launched in 3Q2017, bringing new revenue opportunities for M1.

The fixed services business remains small, at just 15% of service revenue for 1HFY2017. But if M1 is able to keep these growth rates up, investors may be persuaded to buy into the company’s potential as a new technology play.

Competitive pressures M1 may face increased competition in the fibre space, though. Colt, formerly known as City of London Telecom, is reportedly laying out its own fibre network in Singapore’s CBD.

An established provider of network and communications services to businesses across Europe, Asia and North America, Colt has networks across major cities such as London, New York and Hong Kong.

The company is owned by Fidelity and headed by Carl Grivner, former CEO of Asian undersea cable operator Pacnet.

Meanwhile, OCBC analyst Eugene Chua is sceptical of M1’s efforts to diversify away from the mobile consumer market.

“With 100% exposure to Singapore, the next viable revenue stream to help mitigate the impact of TPG would be its enterprise business. That said, we do not expect M1’s enterprise business to be able to materially offset the decline in its mobile business, which forms the substantial part of its revenue,” he says.

It may take more than a new source of revenue for M1 to convince investors that it can continue to grow its dividends or its bottom line. At least one analyst says telcos in general need to consider changes to their business models.

“The problem remains that there are top-line challenges, yet there are new players emerging still, and with lower cost structures. The incumbents are struggling, and prices will fall further while network investment remains high,” says Sachin Gupta, managing director of consultancy New Street Capital Asia.

“This is not good for returns or valuations. The market structure needs to be relooked at some point in time — be that in the form of consolidation or even carving out underperforming assets.”

Until that happens, shares in M1 may continue to slip.

M1 will need to evolve into enterprise services play as dividend attraction dips

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