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M1 - Great Defensive Stock
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Pinnacle
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23-Oct-2007 09:20
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OCBC - MobileOne Ltd: Upgrade on defensive nature Good results due to lower costs and interest expenses. MobileOne (M1) delivered a good set of 3Q07 results. Revenue came in at S$200.2m (flat QoQ, +5.8% YoY) with net profit at S$43.6m (+8.0% QoQ, +1.6% YoY). The stronger sequential bottom-line was due to lower operating expenses (specifically due to lower handset costs) and borrowing costs due to repayment of S$40m in debt. M1?s 3Q07 EBITDA came in atS$85.9m, +5% QoQ but flat YoY. The better sequential performance appeared to be driven by lower handset subsidy, but this is unlikely to be sustainable. Post-paid remains the most important. M1 saw a 58,000 QoQ increase in the number of subscribers ? 9,000 new prepaid and 49,000 new postpaid customers. Although postpaid saw more customers, MOU was flat and ARPU fell slightly. The net effect was only a 1.6% QoQ increase in revenue. On the other hand, prepaid saw MOU pick up on the back of flat ARPU. The net effect was a sequential revenue growth of 4.8%. Going into the important 4Q, we expect aggressive promotions by M1, and this in turn is likely to increase its acquisition/retention cost from the current S$179 and S$119 per subscribers, lowering overall margins. Number portability likely in 1H08. Moving into 2008, M1 expects mobile number portability (MNP) to be introduced by 1H08. Prior to MNP introduction by regulators, the market place is likely to heat up with the 3 telcos attempting to tie up customers with attractive promotions. This in turn is likely to raise acquisition and retention costs, eroding margins even more. However, unlike its rivals, M1 does not offer many other services to spread its costs. As such, we see MNP to be negative to M1. Upgrade to BUY for its defensive nature and high dividend. M1 is committed to payout of 80% of its net profit. We estimate that this should translate to about 15.0 cents or an attractive 7.4% dividend yield for FY08. While we anticipate the operating environment to get tougher for M1, the recent sell-down has made its stocks attractive. Based on S$2.06, we see a potential 13% upside to our fair value of S$2.33 and together with a dividend yield of about 7%, the total return could be over 20%. We thus upgrade our rating on M1 from HOLD to BUY and see it as defensive in the current volatile climate. |
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