M1 - UOB Kay Hian 2015-12-18: The Ugly Duckling Could Turn Into A Swan

M1 LIMITED B2F.SI

M1 (M1 SP) - The Ugly Duckling Could Turn Into A Swan

M1 continues to differentiate its mobile services through its Data Passport service and enhanced customer care.
For enterprise customers, M1 has launched an extensive range of XGPON services with speeds ranging from 2 to 10Gbps and also introduced M2M Connect.
The stock is out of favour but we see the opportunity for a strong rebound in the event that we do not have a fourth mobile operator.
Target price: S$3.26. Maintain BUY.

M1’s Data Passport services allow customers to use their data bundle overseas at a monthly subscription of S$10 per country.
Customers are able to use their smartphones as they do when in Singapore without worrying about incurring hefty roaming charges. Data Passport services are available for Malaysia, Indonesia, Thailand, Philippines, Hong Kong, Taiwan, Japan, Australia, Saudi Arabia and the US.
M1 has also extended Data Passport service to European countries (Austria, Croatia, Czech Republic, France, Germany, Hungary, Italy, Netherlands, Poland, Russia, Slovakia, Spain, Sweden, Switzerland and the UK) at S$50 per month.

M1 has overhauled its billing and customer care system by using Oracle and Comverse software integrated with Microsoft .NET framework. Multiple legacy systems were consolidated to provide a comprehensive and unified view of customers across all product lines.
The new system has improved operational efficiency at retail outlets and service provisioning for fibre broadband services.
M1 also utilises data analytics to determine customers’ preference and consumption patterns to improve the focus and effectiveness of its marketing efforts.

M1 has expanded its enterprise solutions through an extensive range of GPON (gigabit passive optical network) corporate connectivity services.
The new XGPON service, offering speeds ranging from 2-10Gbps, is the fastest fibre service on Next Gen Nationwide Broadband Network (NGNBN).
M1’s XGPON services are scalable and cost-effective and particularly suitable for businesses with high bandwidth requirements, such as gaming and media companies.

...but generate half of its revenue from fibre broadband. M1 is a sub-contractor to NetLink Trust, who owns the core fibre infrastructure for NGNBN. Thus, M1 is better positioned to influence timeliness of service provisioning to its corporate customers.

M1 has launched M2M Connect, an advanced M2M (machine-tomachine) platform. M2M, also known as Internet of Things, connects millions of devices such as vending machines, trucks, appliances and buildings.
M1’s corporate customers are able to access, track and manage all their connected devices through M2M Connect. They appreciate the flexibility provided by M2M Connect to directly manage mobile connections to their pool of connected devices.
According to Markets & Markets, the market for M2M connections is expected to expand at a 5-year CAGR of 11.6% to US$35.2b by 2020. Applications for M2M connections include healthcare monitoring, video surveillance and smart metering.

M1 is out of favour and neglected. Investors should accumulate the stock on current weakness.
M1 provides an attractive free cash flow yield of 6.9% and dividend yield of 5.3%. It would rebound the strongest in the event that we do not have a fourth mobile operator.

We have conducted a scenario analysis based on two possible outcomes: Scenario A - No new entrant, and Scenario B - Fourth mobile operator disrupts the status quo. We attribute a probability of 75% for Scenario A and 25% for Scenario B. Our probability-weighted target price for M1 is S$3.26.
In the event that we do not have a fourth mobile operator (Scenario A), our target price for M1 would be S$3.58 (Upside: 32.6%). In the event that a fourth operator enters the mobile market (Scenario B), our target price for M1 would be S$2.31 (Downside: 14.4%).

M1 provides attractive free cash flow yield of 6.9%.
Investors flocking back to M1 in the event that we do not have a fourth mobile operator.

Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2015-12-18

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 3.26 Same 3.26