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Morningstar | M1 2Q18 Gaining Mobile Market Share but Wary Ahead of New Entrant Launch in the 2H

We saw nothing in M1's second-quarter result to change our view that M1 will be the most exposed Singapore operator to TPG entering the mobile market in 2018 given it has fewer bundled customers than its rivals, StarHub and SingTel and around three fourths of its service revenue is from mobile services. The result itself was slightly ahead of our expectations with services revenue up 5.2% year on year, EBITDA up 1.4%, and earnings per share up 2.6%. Mobile service revenue grew 3.8%, continuing the positive turnaround seen since mid-2017 and management highlighted that the 27.4% growth in fixed line services revenue was boosted by contribution from several corporate projects which can be “lumpy.”

We retain our fair value estimate of SGD 1.54 per share and our narrow moat rating and negative moat trend. Management indicated that it expected second-half profitability to be lower than first-half on an IFRS 15 accounting basis (so below SGD 73 million) and maintained capital expenditure guidance at SGD 120 million. Our forecasts have EBITDA growing by 3% in 2018 with reductions of 4%-5% per year in 2019 and 2020 due to TPG competition followed by some recovery in 2021. Our narrow moat rating driven by cost advantages and intangible assets is retained. Our negative moat trend, driven by the impending launch of mobile service by new entrant, TPG, in 2018 is also retained.

M1’s mobile services revenue (excluding international), which is 76% of total services revenue, was up 3.8% year on year in the first quarter. M1's mobile services revenue share of the market had gradually fallen from 30% in 2003 to 19% in 2016 but stabilized in 2017 and exited the first-quarter 2018 at 20%. The strong performance of M1's mobile virtual network operator, or MVNO, called Circles.Life has helped in M1's market share recovery but M1 is not able to provide details on its contribution due to nondisclosure clauses in its contract. Over the past four years, M1's fixed-line broadband market share has also increased to 14% from 7% which seems to also be helping its performance in the mobile market. Management highlighted that mobile data usage has exploded with average monthly data usage per mobile customer jumping to 5.2 GB from 3.9 GB a year ago. This has caused the percentage of customers breaking through their data caps to jump to 34% this quarter from 29% in the first quarter. However, we believe that TPG will come into the market in an aggressive fashion later this year which will likely pressure pricing in 2019 and 2020. M1's international call revenue was down 27%, an acceleration in the decline seen in recent quarters, while fixed services revenue was up 27%.

M1 provided an update on 5G standards indicating that Phase 1 of these standards was finalized in June this year with Phase 2 standards targeted to be finalized towards the end of 2019. Equipment would likely become available around nine months after the standards have been frozen. M1 is currently working with two equipment vendors on trials and will likely go with a multivendor approach. M1 needs both equipment to be available and rolled out and also access to spectrum and the Singapore government has yet to decide on how spectrum will be allocated. M1 expects 5G capital expenditure to be demand-driven and it is too early to provide guidance on magnitude and timing. We assume capital expenditure to jump from the SGD 120 million level to SGD 150 million in each of 2020 and 2021, which implies a limited increase. Should 5G follow previous generational upgrades where operators aggressively rolled network out this could prove to be conservative.