M1 - All Is Not Lost; Upgrade To HOLD

We are no longer bearish on M1 after share price corrected 18% post announcement of its 1Q15 results. M1 continues to upgrade its network to improve data throughput and enhance bundling to create value for customers. It has put in efforts to improve customer service and cost efficiency. Upgrade to HOLD.

Target price: S$3.60. Entry price: S$3.10.

WHAT’S NEW
Keeping abreast of the latest technology. M1 has completed the upgrade of its 4G network to Long Term Evolution-Advance (LTE-A) in Dec 14, doubling download speed to 300Mbps using carrier aggregation. The network supports voice-over-LTE (VoLTE), which provides faster connection and better quality of voice calls. M1 has also deployed 4G small cells to improve data throughput within buildings to the same level as outdoor.

Bundling to create stickiness. M1 was able to bundle multiple services since it launched fibre broadband services on 1 Sep 10. To date, M1 has garnered a subscriber base of 108,000, representing a market share of 14.2% for fibre broadband. It has recently launched the fastest fibre broadband service at 10Gbps aimed at enterprise customers, such as data centres, financial institutions and cloud service providers.

Some 90% of M1’s fibre broadband subscribers also use M1 for mobile services. M1 offers discount of 15% for customers with one fibre broadband service and two post-paid mobile lines. The discount increases to 25% for customers with four mobile lines. The ability to bundle mobile services with fibre broadband and digital voice line has enabled M1 to gain market share in post-paid mobile over the past three years.

Revamp customer service. M1 has refreshed and renovated its 14 M1 shops with a new store layout based on the counter-less concept. Sales staff is trained to handle the full range of services, including enquiries, processing and payment, using handheld tablets. M1 also introduced user-friendly self-service registration and bill payment kiosks.

M1 plans to provide more customer services through online self-service channels. Customers could sign up for new services, re-contract, check data usage and check bill balance via M1’s website. It has introduced a handset pre-order and collection service. Customers could select their preferred model, make payment and choose a pick-up location or have the handset delivered to their homes. Such online services save time for customers while, at the same time, improve M1’s cost efficiency.

Investing in Oman. M1 has entered into an agreement to invest S$10m for a 15% stake in Telecom Oman (TeO). TeO is an international gateway operator and a mobile services reseller (mobile virtual network operator or MVNO) in the Sultanate of Oman, a high-income country with a population of 4m. Oman has an oligopoly of two mobile operators offering mainly services on a pre-paid basis. TeO could evolve to become the third mobile operator in Oman. M1 could increase its stake in TeO should it require capital injection to finance its expansion.

STOCK IMPACT
Out of the quagmire but not out of the woods. M1 remains susceptible to regulatory risks in Singapore, with mobile accounting for 81.5% of its service revenue in 1Q15. Nevertheless, we are on longer bearish on M1 after share price corrected 18% post announcement of its 1Q15 results.

EARNINGS REVISION/RISK
We maintain our existing earnings forecasts.


Technical Analysis
Daily Chart
VALUATION/RECOMMENDATION
Upgrade to HOLD. Our target price is S$3.60, based on DCF (required rate of return: 7.2%, terminal growth: 1.0%). Entry price is S$3.10.

SHARE PRICE CATALYST
• Growth from mobile business, augmented by expansion in fibre broadband.

• Capital management through special dividend provides positive surprises.

• The IDA is expected to announce its assessment of the submissions to its industry consultation and the framework for the upcoming spectrum auction. (Read Report)

Source : UOB KayHian Research

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