By Carey Wong
Mon, 19 Apr 2010, 08:56:05 SGT

M1 Ltd posted its 1Q10 results over the weekend, with revenue was up 33.6% YoY and 15.2% QoQ to S$249.0m, or about 17.5% ahead of our estimate, but it was mainly due to handset sales (iPhone). Net profit fell 6.2% YoY, though up 5.6% QoQ, to S$39.3m, and was 1.3% below our forecast. Nevertheless, the iPhone 3GS has definitely helped M1 to further increase its post-paid customers by 2.3% QoQ to 933k (+21k); it also managed to reduce its monthly churn from 1.6% in both 1Q09 and 4Q09 to 1.4%. Buoyed in part by internal efficiency, a return to normalcy in economic activities and new business opportunities (provided by the NBN), M1 now expects 2010 earnings to improve as compared to 2009 (vs. comparable previously). To reflect the higher handset sales and recent margin trend, we raise our FY10 estimates for operating revenue by 20.8% and net profit by 1.5% and FY11 by 23.0% and 7.6% respectively. This also bumps up our DCF-based fair value from S$2.28 to S$2.40. Maintain BUY.

1Q10 results show margin erosion. M1 Ltd posted its 1Q10 results over the weekend. Although revenue was up 33.6% YoY and 15.2% QoQ to S$249.0m, we note that it was mainly due to handset sales, which surged 384.9% YoY and 87.2% QoQ; this due to higher value handsets (iPhones and other smartphones) and the addition of new subscribers. But as handset sale is typically subsidized (probably more so for the iPhone), EBITDA margin fell from 41.3% in 1Q09 and 36.7% in 4Q09 to 30.9% in 1Q10. Hence, net profit fell 6.2% YoY, though up 5.6% QoQ, to S$39.3m. As such, it also explains why net profit was about 1.3% below our forecast despite revenue coming in 17.5% ahead of our estimate.

But iPhone helping to add and retain subscribers. Nevertheless, the iPhone 3GS has definitely helped M1 to further increase its post-paid customers by 2.3% QoQ to 933k (+21k). While post-paid ARPU (Average Revenue per User) dipped slightly from S$61.0/month in 4Q09 to S$59.7 in 1Q10, M1 explained that it was mainly due to seasonality (resulting in lower minutes used); but it expects ARPU to stabilize and recover slightly in the coming quarters. Monthly churn has eased further from 1.6% in both 1Q09 and 4Q09 to 1.4% in 1Q10. However the new adds came with a higher cost – acquisition cost has jumped by another 21.8% QoQ to S$369; but M1 notes that this should come off until the next highly-sought after handset arrives. On the pre-paid front, subscribers grew by 2.0% to 863k (+17k) due to top-up promotions among other things.

Upgrades earnings guidance. Buoyed in part by internal efficiency, a return to normalcy in economic activities and new business opportunities (provided by the NBN), M1 now expects 2010 earnings to improve as compared to 2009 (vs. comparable previously). For its fixed segment, M1 intends to offer a comprehensive suite of services for homes and offices; some of these services include Internet access, fixed voice, managed services, IP telephony among others. As for capital management, M1 prefers to remain prudent as it needs to consider its capex needs, which should remain around S$120m in 2010, but should ease back to 10% of operating revenue from 2011. To reflect the higher handset sales and recent margin trend, we raise our FY10 estimates for operating revenue by 20.8% and net profit by 1.5% and FY11 by 23.0% and 7.6% respectively. This also bumps up our DCF-based fair value from S$2.28 to S$2.40. Maintain BUY.