SINGAPORE (Mar 27): UOB Kay Hian is maintaining its “sell” recommendation on M1 with a target price of $1.60 on expectations of stiff market competition from the impending entry of TPG Telecom as Singapore’s fourth mobile operator in 2H18.

In a Tuesday report, analyst Jonathan Koh highlights the increasingly urgent need for the telco to diversify its business and sources of revenue, especially given how its mobile business contributed to a “whopping” 76.7% of its service revenue in 4Q17.

While the analyst is cognisant of M1’s current efforts to reshuffle its revenue mix by expanding into corporate ICT and digital services as a new growth engine, as well as securing several multi-year contracts from government agencies and large corporations for various public sectors, he believes these new ventures will require a gestation period to scale up.

“Mobile, fixed network services and corporate ICT & digital services contributed 76.7%, 16.8% and 1-2% of service revenue respectively in 4Q17,” shares Koh on his key takeaways from M1’s Investor Day event held on Monday.

“Management sees corporate ICT/digital services as a new growth engine. It envisages its revenue mix to shift toward 60:20:20 in future. M1 is looking at acquisitions in complementary and adjacent businesses to achieve the desired revenue mix,” he adds.

Meanwhile, Koh believes revenue from fixed network services is to maintain the group’s growth momentum ahead.

Although this is likely to keep earnings contributions positive, he thinks lower margins from M1’s new ventures would drag on overall margins going forward.

“[M1’s] diversification to newer pastures has taken on greater urgency. Management plans to expand into corporate ICT and digital services, e.g. managed infrastructure, cyber security, smart nation solutions, cloud computing and data analytics. Margins for these solutions are lower and would drag overall margins lower as well.” concludes Koh.

As at 11.26am, shares in M1 are trading 1 cent lower at $1.76 or 12.4 times FY18 forecast earnings.