M1’s 3Q results: A stumble before the fall?

Maybank Kim Eng and UOB Kay Hian are keeping their “sell” calls on M1 Limited, further lowering their target prices from $2.04 to $1.90 and from $2 to $1.76 respectively – while CIMB maintains its “hold” recommendation on the stock with a lower price target of $2.55 from $2.80 previously.

This comes after the mobile operator yesterday posted a hefty 23.4% decline in 3Q earnings, which came in below the expectations of all three research houses.

Maybank analyst Gregory Yap says the biggest concern regarding M1’s 3Q financial results was its much sharper y-o-y fall of postpaid revenue of 6%, versus 1-2% in the past few quarters – even before the appearance of a fourth mobile entrant.

“Spectrum prices, if chased up by the new entrant(s), could stretch M1’s balance sheet further,” explains the analyst, noting that the telco’s net debt/EBITDA of 1.2x is already the highest in the sector. He also stresses that M1 stands to lose the most from a new competitor due to its purely-Singapore and mostly-mobile focus.

Although M1 maintains its 80% dividend payout guidance, Yap believes investors will see dividend per share (DPS) dipping along with its falling profits.

UOB analyst Jonathan Koh, too, warns that the telco’s steep fall in post-paid revenue is “likely to give investors a negative surprise” while prospects for an operational turnaround or a reversal to positive news flow are dim.

“Customers have become more cost-conscious due to the dismal outlook for the economy. In addition, we see increased competition in data with all three incumbents offering attractive upsize options,” observes Koh.

Considering how M1’s management attributed the decline to a reduction in excess charges for data and lower contributions from roaming, UOB has cut its net profit forecast for the group’s 2016 earnings for 2016 and 2017 by 6% and 13% respectively.

Likewise, CIMB has also cut its FY16-18F core earnings per share (EPS) forecasts by 8.3-9.6% to factor in lower mobile service revenue.

“We now see core EPS dropping 13.9% in FY16F, growing 4.3% in FY17F, then falling by 17.7% in FY18F, impacted by competition with the entry of a fourth mobile operator,” says CIMB analyst Choong Chen Foong.

“Our discounted cash flow (DCF) target price [of $2.55] is set at the mid-point between the scenario of a fourth mobile player entering the market ($2.10) and status quo ($3.00), though we believe the former scenario is more likely,” he adds.

Shares of M1 closed 12 cents at $2.21.

This article first appeared in The Edge Singapore Market Report.

Read more: The battle of the telcos – 5 things you need to know about M1

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