Qala will spearhead M1’s entry into the corporate business

M1 announced two significant investments recently. One, it will bootstrap itself a presence in the corporate fixed broadband via the acquisition of Qala, a local internet service provider. Two, it will launch the Novatel MiFi, a battery-operated mobile router that allows users to create and bring with them their own personal wireless hotspot wherever they go, even while in a car or in a remote area where there are no public hotspots.

M1 will pay up to $17.9m (of which $3m is subject to financial targets being met) for Qala, a nine-year old SBO-based ISP originally seeded by Creative Technology but owned largely by two individuals. It provides data and communications services to corporate customers almost exclusively, while in its consumer business, subsidiary QMax is one of three providers of the free nation-wide 1Mbps WiFi service, Wireless@SG.

Qala’s profits are currently negligible compared to M1 but it will allow M1 to provide SMEs with a cheaper alternative to SingTel, which monopolizes the data and telecom needs of companies operating in non-CBD areas. In addition, Qala will be able to cross-sell M1’s consumer Internet services, such as its 7.2Mbps wireless broadband. M1 anticipates minimal capex - no network investment will be needed while backend support can be combined with its existing consumer facility.

We reckon the innovative MiFi device could have a positive impact on M1’s market share in mobile broadband, which stood at 137,000 (dongles only) as at Jun 2009 (estimated to be 25-30% market share). M1 is the first telco in Asia to launch this device. As it allows up to five devices to be simultaneously connected at 7.2Mbps download speed, it may even prompt existing dongle users to switch, depending on the prices for the device and data plans, as well as supplier exclusivity.

We reiterate our view that M1 will have the biggest upside once NGNBN comes online. Its acquisition of Qala is a credible step in filling up its lack of a corporate business, and will give it upside beyond the consumer business alone. We will start to model in NGNBN benefits once there is more clarity. Target price is raised to $2.18 (13x FY09) with higher peer valuations. M1 is still attractive at 7.2% yield. Maintain BUY.

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MobileOne: Hitting the right buttons

A concrete step in the corporate data segment. M1 has acquired Singapore-based Internet Service Provider “Qala Singapore” for about S$17.9m in cash. Out of S$17.9m, S$3m would be paid only if Qala meets its annual targets in June 09. Qala has 9-year experience in providing data centre and broadband solutions to Singapore corporates.

Corporate data segment is worth over S$1 bn annually. Corporate data market is estimated to be worth over S$1 bn annually in Singapore, where SingTel is the dominant player. Despite NBN providing level playing opportunity in 2010, our earlier impression was that M1 could hardly make an impact in the corporate segment due to the lack of expertise and track record. However, by acquiring corporate data capability through Qala, M1 should be able to secure decent market share among SMEs and corporate customers. M1 can take care of consumer broadband segment on its own through its extensive island wide distribution network.

How much can M1 benefit from broadband? The household fixed broadband penetration is around 74% in Singapore, implying the market is not completely saturated yet. M1 is keen to gain 20% market share in the broadband market in the next five years. Overall, we estimate, M1’s top line could grow by about 20-25% in the next five years from consumer and corporate broadband. While broadband margins are difficult to estimate, M1’s bottomline should grow by at least 10% in a similar time frame. We would model NBN benefits into our model, once we have more clarity on broadband margins.

MobileOne - Qala buy to boost strength in corporate broadband

M1 is acquiring Qala Singapore Pte Ltd, an Internet Service Provider focused on the corporate, enterprise and public sector markets in Singapore. Qala has a Service Based Operator (SBO) licence with a staff strength of less than 100.

M1 will be paying S$14.9mil when the deal is scheduled to be completed in a month’s time, and will pay another $3mil upon the satisfaction of certain financial targets for its financial years till 30 June 2011. While its profitability is not disclosed, Qala’a net book value of $2.8mil works out to price-to-book valuation of 5.3 to 6.4x, lower than M1’s 6.7x at 1H09.

More important to note, M1 is buying Qala’s ready base of corporate customers to gain a faster breakthrough in the fixed broadband market. This is in preparation for its entry as a Retail Service Provider (RSP) in the Next Generation National Broadband Network (NGNBN) when commercial services launch in 2Q2010. The bulk of Qala’s corporates are small and medium enterprises (SMEs) typically with employee count of less than 100.

We view the deal to be positive for M1, immediately boosting its experience and knowledge base in the SME market with fixed broadband services. A year ago, M1 started to venture into the fixed broadband market as a reseller. In 1H09, M1 reaped a mere $0.8mil in revenues from this new segment - pittance, against total service revenues of 347.4mil.

At the same time, with a new pool of corporate names, M1 would also be able to cross-sell its mobile services into the enterprise arena. To-date, the corporate segment still accounts a small portion (we estimate less than 10%) of M1’s revenues. Typically, a corporate mobile user is less price-sensitive and commands higher ARPUs.

Apart from higher call volumes, usage of IDD, roaming as well as data, boosts ARPU. By comparison, M1’s postpaid monthly ARPU was $60.2 in 1H09, while StarHub’s was $68, and SingTel’s $83 across 1QFY10 and 4QFY09 (YE March).

As buying Qala improves M1’s market positioning and strength as an RSP in the NGNBN, we have upgraded our fair value by 8% to S$2.18, on revising terminal growth from -5% previously to -4%. M1 shares have risen 11% since our 17 July results note, and we maintain our BUY rating, as current price offers a 23% upside to revised fair value.

MobileOne - cost control still the key focus

Despite aggressive promotions in 2Q09, MobileOne (M1) was able to improve its service-EBITDA margin on the back of tight cost control. M1 expects to make further savings on operating expenditure from the rollout of its own backhaul infrastructure, and moving its call-centre operations offshore to Malaysia by the end of December 2009.

The ‘Take 3’ promotion, which targets high-end subscribers, had a small impact on 2Q09 earnings as the handset subsidies are capitalised and amortised over a 24-month service contract. We estimate the service-EBIT margin would have declined by two percentage points if the handset subsidies had been charged as they were incurred.

M1 disclosed that it aims to achieve over a 20% share of the corporate and residential broadband market by 2015, but remained tight-lipped about its transformation strategy.

We have revised up our net-profit forecasts for FY10-11 by 2-4% to take into account M1’s cost-control initiatives. As a result, we have raised our six-month target price to S$1.51 from S$1.47, based on a target PER of 9x on our revised FY10 EPS forecast. We maintain our 4 (Underperform) rating given what we see as M1’s uncertain transformation strategy, while cost control is unlikely to be a strong share-price catalyst.

Mobileone - Cost controls in place but little else

In line. M1’s 1H09 annualised results are in line with market and our expectations, with deviations of 0.3% and 0.7% respectively. As expected, a tax-exempt interim DPS of 6.2cts (2Q08: 6.2cts) for a 70% net payout was declared.

Topline belatedly rose. M1 reversed four successive quarters of revenue decline with revenue growth of 2.2% this quarter, thanks to higher postpaid revenue, more emphasis on customer acquisition/retention, higher handset sales, stabilising roaming and robust growth of wireless broadband. Postpaid revenue (65% of 1H09 revenue) rose 1.1% qoq, aided by a 0.8% qoq increase in postpaid subscribers and a 1.1% increase in ARPUs largely due to the success of its Take 3 programme. Take 3 has also attracted more mid-to-high-end users.

Cost controls hemmed in higher SARC. Despite chasing market share and ramping up subscriber acquisition and retention costs (SARC), EBITDA margins were fairly stable qoq (+0.1% pt qoq), thanks to fairly active cost control. The main savings came from lower staff costs from a freezing of headcount, and lower bonuses and bad debts.

Guidance in place. M1 elucidated its 1Q guidance of “stable operations”. It now expects FY09 PAT to be comparable to FY08’s, in line with our forecast of 1.8% yoy growth, despite challenging operating conditions. It will continue to focus on cost management, efficiency, the introduction of new initiatives to address growth segments and investing in future growth. M1 also reiterated its dividend policy of an 80% net payout for FY09.

Maintain forecasts, target price and rating. We leave our forecasts and DCFbased target price of S$1.54 (WACC: 11.5%, LT growth: 1%) intact as the financial performance was in line. M1 remains a NEUTRAL as we see few positive catalysts for the stock. While revenue has rebounded qoq, growth remains unexciting. But downside should be limited by its attractive yields of about 9%. Our top pick remains SingTel (OUTPERFORM, target of S$3.20 under review). For exposure to yields, we advocate a switch out of StarHub (Underperform, target S$1.58) to M1.

MobileOne - Q209 results provide some comfort

Q209 results better than expected; signs of stabilisation MobileOne (M1) results were better than expected due to higher revenues and good cost control (tables 1-2). On the cost side, staff costs and facilities costs remained low, similar to Q109. The turnaround in M1’s revenues in Q209 after a continued decline in the previous quarters (Chart 1) is comforting, in our view. Mobile data’s contribution to service revenue increased to 10.9% compared with 9.3% a year ago. We believe M1 has secured some mid-to-high-end subscribers through its Take3 plan.

Near-term outlook remains unexciting but dividends supportive M1 stated during the conference call that the revenue outlook in H209 remains challenging due to macro uncertainty. M1 will continue to show cost discipline to maintain net profit at the 2008 level. We believe 8% dividend yield provides share price support for M1. M1’s dividends are supported by the solid balance sheet (0.7x net-debt-to-EBITDA) and cash flows (11% eFCF yield). Management stated M1 will keep its dividend payout ratio at 80%.

Expect mid-to-long-term improvements as M1 utilises NBN Despite the unexciting near-term outlook, we believe the medium-term outlook is positive as the next generation national broadband network (NBN) gives M1 a potential new revenue stream from broadband.

Valuation: retain Buy rating with a S$2.00 price target We maintain our Buy rating on M1 as the company provides a stable dividend and potential mid-to-long-term growth through NBN. We base our price target on DCF, using a WACC of 8.6% and 0% terminal growth.

Mobile One - More growth-targeted initiatives ahead of NBN

Although YoY comparisons are still negative, the critical postpaid mobile revenue stream reversed a five-quarter decline in 2Q09. M1 added 50,000 mobile subscribers in 2Q09 (including 7,000 postpaid subs), reversing 1Q09’s 11,000 erosion. Notably, the multi-quarter decline in postpaid ARPU was also arrested during the quarter and roaming traffic has also started to turn around for the first time since the crisis started.

As expected, margins improved from a year ago, offsetting the YoY decline in revenue. EBITDA margin on service revenue rose from 43.6% in 2Q08 to 44.7% in 2Q09. This was driven by more customers taking on mid to high-end mobile plans under the Take 3 program as well as higher mobile data usage on its HSDPA network. QoQ, net profit fell 12% to $37.1m only because there was a $5.5m tax credit in 1Q09. Adjusted for that, net profit rose 1.5% QoQ.

Although subscriber acquisition and retention costs of $301 were higher QoQ, it is still down from $346 a year ago. M1 is guiding for similar levels of spending in future quarters but our forecasts already assume higher customer spending. Further, we do not expect SingTel’s recent iPhone 3GS launch to drive a big jump in defensive industry spending, unlike 1H08, as there are now more smartphone alternatives available.

All the telcos will be racing to make sure they get all the high value subscribers they can before NBN comes online. Unlike StarHub and SingTel, which can bundle fixed broadband and Pay TV, M1 is likely to focus on mobile broadband, a growth area due to the profileration of smartphones and netbooks. This could raise costs but we believe M1 has already factored this into its guidance of earnings stability for 2009.

Management reiterated its outlook of a stable 2009 in terms of earnings, as well as a commitment to paying 80% of earnings in dividends, which will still yield a very attractive 8% at current levels. (Interim dividend was maintained at 6.2 cents.) The NGNBN should benefit M1 more than the other telcos in the long term given its relative lack of bundling capabilities, but growth-oriented investors may prefer SingTel in the short term.

MobileOne Ltd: 2Q09 results within expectation

2Q09 results mostly within expectation. MobileOne (M1) reported its 2Q09 results last evening, with revenue down 7.2% YoY to S$190.5m, or around 24.5% of our full-year estimate, again feeling the effects of the economic slowdown; but up 2.2%3% QoQ at S$186.4m, thanks to its Take3 program, which resulted in subscribers taking up higher price plans. However, net profit dropped 9.7% YoY to S$37.1m, or around 25.8% of our FY09 forecast. While it was also down 11.5% QoQ, we note it was really due to a tax credit of S$5.5m in 1Q09; excluding it, earnings would have risen 1.9%.
For the first half, revenue slipped 7.9% to S$376.9m, while net profit eased 0.3% to S$78.9m, meeting 48.4% and 54.9% of our FY09 forecasts respectively. M1 has also declared an interim dividend of S$0.062/share, or 70% of its 1H09 earnings, unchanged from last year.

Regains lost ground. On the business front, M1 managed to regain lost ground following slightly more aggressive promotions in both the pre- and post-paid segments; overall subscribers rose by 50k vs. 12k decline in 1Q09, led by a 43k increase in pre-paid users. But on the post-paid front, we note that its market share continued to slip from 26.8% in 1Q09 to 26.5%, despite adding 7k more subscriptions. While monthly churn rate eased from 1.6% to 1.5%, it came with higher acquisition and retention costs (see Exhibit 2). However, this came as no surprise as we had already highlighted a likely increase in our previous report. As for its IDD business, revenue fell 13.7% YoY to S$32.8m, hit by lower tourist arrivals, but rose 2.5% QoQ, suggesting the worst may be over.

Outlook remains tough. Going forward, M1 continues to expect the operating environment to remain "challenging", mainly due to the ongoing economic slowdown. Nevertheless, it intends to remain disciplined in cost management and improve efficiency; also guides for comparable net profit vs. FY08. M1 has maintained its 80% payout ratio for the full year as well as S$100m capex target. As the economic outlook is still uncertain (may face a long-drawn recovery), we continue to like M1 for its defensive and strong free cash flow-generating business, and dividend paying ability (80% payout ratio). We also see M1 as one of the biggest beneficiaries of the NBN initiative. As such, we maintain BUY and S$2.12 fair value.

M1 is Emphasizing profitability over market share

M1’s latest offerings – Take3 and the Sunsurf VAS data plans – are aimed at luring higher ARPU users that can help improve margins instead of chasing market share. M1 has also been advertising more in recent months. We reckon these initiatives should impact positively on margins and market share in the segments that matter within 1-2 quarters.

Take3 (launched in Feb) allows users to choose a eligible handset within the subscription plan tiers without any upfront cost and exchange it for another handset after 9 months (for a fee) or after 20 months (without a fee). Out of the 5 bill plans, we reckon targeted users are most likely to opt for the $83/month SunMax plan as it includes popular phones (eg HTC Touch Diamond 2 and Blackberry Storm) that are also in the top-end $201 Talk All U Can plan. As phone buyers are more sensitive to the upfront handset cost than the monthly fees, this plan should boost ARPU.

M1’s new SunSurf VAS data plans also offers the most value-for-money. The $10.70/month 100MB Plus plan is the most compelling as it offers 10x more bundled data capacity vs StarHub’s Value plan. As these plans are targeted at high-end users that buy feature-rich smartphones that can download music or stream video, we believe these plans could also motivate users to switch to M1, especially SingTel which has no cap on monthly charges (unlike M1 or StarHub, which are capped at $36.38).

Although M1 lost 11,000 subscribers in 1Q09, the decline was due to a 53,200 fall in 2G subs, where users are being migrated to 3G, and the deactivation of 8,000 prepaid subs. Most notably, M1 gained 50,200 3G subs and we believe Take3 was one major factor. Management indicated that 20% of new subscribers in 1Q09 took up the Take3 plan.

Given these positive driving forces, we reckon margins should improve further and M1 stands a good chance of arresting its postpaid ARPU slide, which has fallen from $62 in 1Q08 to $60 in 1Q09. We maintain our Buy recommendation and target price of $2.01.

M1 - Decrease in market share

1Q FY2009 results. For 1Q FY2009, M1 reported operating revenue of S$186.4m (-8.6% yoy), profit before tax of S$44.1m (-5.8% yoy) and net profit of S$41.9m (+10.3% yoy).

There are four main revenue segments: telecommunication services, international call services, fixed network services and handset sales. Telecommunication services registered 8.4% decrease in revenue to S$140.3m. Postpaid revenue fell by 9.9% to S$122.6m while prepaid revenue increased by 3.5% to S$17.7m. Moreover, international call services posted 5.0% drop to S$32.0m while handset sales fell by 18.7% to S$13.9m. Fixed network services was a new segment that contributed revenue of S$0.3m.

Operating expenses also decreased to S$141.3m (-9.0% yoy) due to lower handset costs and staff costs. M1 benefitted from the Jobs Credit Scheme, paid lower bonus and hired fewer staff.

Despite the drop in revenue, net profit increased mainly due to the 75.0% decrease in provision for taxation from S$8.8m in 1Q FY2008 to S$2.2m in 1Q FY2009. This was a result of the reduction in corporate tax rate from 18% to 17%.

Profit margin. Net profit margin increased from 18.8% in 4Q FY2008 to 22.5% in 1Q FY2009 due to the tax adjustment. Based on a year-on-year comparison, it rose from 18.6% in 1Q FY2008 for the same reason.

Decrease in market share. M1 saw a decrease in the number of prepaid and postpaid customers from 748,000 and 882,000 in 4Q FY2008 to 740,000 and 879,000 in 1Q FY2009 respectively. Its market share for the prepaid and postpaid segments has also decreased from 24.4% and 27.2% in 4Q FY2008 to 23.9% and 26.8% in 1Q FY2009 respectively. As M1 does not have Pay TV, it is unable to offer bundled services to customers. This is a concern as it is likely to lose market share to SingTel and StarHub.

Outlook for FY2009. M1 expects 2009 to be a challenging year due to the global financial crisis. Despite the economic downturn, it expects operations to remain stable. Moreover, its dividend policy for 2009 is to pay 80% of net profit after tax as dividend.

Maintain Hold with fair value at S$1.67. Based on our valuation using the free cash flow to firm model, the target price is at S$1.67. M1 remains a hold due to its limited focus on the domestic market and the lack of Pay TV services. The dividend yield of M1 is 8.8%.

MobileOne Ltd: 1Q09 results within expectation

1Q09 results mostly within expectation. MobileOne (M1) reported its 1Q09 results last evening, with revenue down 8.6% YoY and 4.3% QoQ at S$186.4m, meeting 24% of our FY09 forecast. Management noted that this decline was due to a combination of the economic slowdown and higher competition. But due to an improvement in operating expenses (mainly due to lower staff costs), profit before tax declined by a smaller 5.7% YoY and 2.2% QoQ to S$44.1m. Meanwhile, net profit jumped 10.4% YoY and 14.5% QoQ to S$41.9m, or around 29.1% of our full-year estimate, aided by a sharp drop in taxes; this was due to one-off accounting adjustment for the reduction in corporate tax rate from 18% to 17%.

Loses post-paid market share as expected. On the business front, M1 felt both the impact of the economic slowdown - leading to lower roaming revenue - as well as stiffer competition. More importantly, M1 saw a near-12k QoQ drop in subscribers in 1Q09, where its post-paid segment lost nearly 4k subscribers, which reduces its market share from 27.2% to 26.8%; this despite a drop in its monthly churn rate from 1.7% in 4Q08 to 1.6%.

We had previously articulated that M1 faces a slight disadvantage due to its lack of bundling abilities as compared to the other telcos, and this could continue to be a concern until it can become an integrated services provider when the NBN (National Broadband Network) comes online from next year onwards. In the meantime, M1 intends to defend and reverse the decline in its post-paid market share. We expect this to result in higher S&P expenses and reverse the decline in average acquisition and retention costs (See Exhibit 1).

Guides for stable operations for FY09. M1 continues to expect 2009 to remain challenging, mainly due to the economic downturn, but it maintains its guidance of stable operations; management later clarified that the stability will be in terms of profitability (See Exhibit 2), citing continued cost discipline and improvements in operating efficiency. We are leaving our FY09 estimates unchanged (already expecting drops of 2.7% and 4.1% in revenue and earnings, respectively). And against the still uncertain economic backdrop, we like M1 for its defensive and strong free cash flow-generating business, and dividend paying ability (80% payout ratio). We also see M1 as one of the biggest beneficiaries of the NBN initiative. As such, we maintain BUY and S$2.12 fair value.