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■ 3Q15 results came in below our forecasts
■ We are cut EPS our forecasts by 4.1-6.3%
■ Maintain Hold (3); lower target price to SGD2.91
M1’s 3Q15 results underscore the ongoing service revenue pressures the industry is facing. Accordingly, we see no fresh grounds to turn more positive on the stock despite the 20% YTD price correction.
What's the impact:
M1 reported 3Q15 net profit of SGD 44.9m (up by 0.7% YoY) on the back of a 1.2% YoY decrease in service revenue and accompanied by a 1.6 pp YoY change in its service EBITDA margin.
Its 3Q15 net profit came in 5% below our forecast due to both lower-than-expected service revenue and higher-than-anticipated depreciation expenses. Total revenue however beat our forecasts due to the high level of handset sales (3Q15: +69%). Meanwhile, EBITDA was in line, as handset subsidies (3Q15: 8.7% of service revenue, vs. our forecast of 9.9%) fell more than we had anticipated.
The poor service-revenue momentum is likely to be the key topic of interest for investors. While the drivers behind weak revenue trends in the IDD (3Q15: -22.3% YoY) and prepaid segments (3Q15: - 4.4%), saturated market and change in customer usage behaviour, are now well understood, the lack of tangible uptick in post-paid revenue (3Q15: - 0.3% YoY), despite the company’s move to raise prices over the past year, has surprised us negatively. The company attributed this to iPhone-related accounting and roaming weakness. Meanwhile, revenue trends in the fixed-services division (3Q15: +20.7% YoY) have been showing steady improvement.
On back the 3Q15 results, M1 has refined its 2015 profit guidance to “low-single-digit growth” from the prior “moderate growth”. Our revised forecasts now imply 2015 earnings growth of 2.1%.
What we recommend:
Given the weak revenue trends in the 3Q15 results, we lower our 2015-17E EPS by 4.1-6.3%. Accordingly, we maintain our Hold (3) rating but with a lower 12-month DDM-based target price of SGD2.91 (from SGD 3.01). The declaration of a special dividend is an upside risk, while an increase in competition is a key downside risk to our call.
How we differ:
Unlike certain views in the market, we expect the shares to be range-bound, with potential upside capped by concerns over new entrant threats and downside limited by a healthy 6.0% dividend yield for 2015E. (Read Report)
Read Related Reports
1) M1 - Marker share declines further by DBS Group Research, published on 20 October 2015
2) M1 - Growth Slowing, Guidance Cut by Maybank Kim Eng Research, published on 20 October 2015
3) M1 - mySIM To The Fore by RHB Research, published on 20 October 2015
4) M1 - Not yet cheap enough given the risks by Barclays Equity Research, published on 19 October 2015
5) M1 Limited - On a flat plane by CIMB Research, published on 19 October 2015
Source : Daiwa Capital Markets