M1 - Revenue trends disappoint

Picture Credits : businesstimes.com.sg
■ 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

What's new:
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%.

Technical Analysis
Daily Chart
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

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