SINGAPORE (July 19): DBS is downgrading M1 to “fully valued” with a lower target price of $1.78 after removing the 25% M&A premium.
This comes after M1’s major shareholders with combined stake of 61%, have announced that they are not going ahead with a strategic review to dispose of their stake.
“Our valuation is based on DCF (WACC 6.3%, terminal growth 0%). Despite an 18% decline in the share price over the last one year, M1 is not cheap at FY18F EV/EBITDA of 8.5x versus the Asian telco average of 7.3x,” says DBS analyst Sachin Mittal.
A potential dividend yield of 5% is also not enough to compensate for annual earnings decline of 12% over FY17F-19F in Mittal’s view.
In addition, due to higher-than expected handset subsidy costs and other operating costs, DBS has cut its FY17F/18F earnings forecasts by 12%/11%.
MyRepublic’s intention to enter as an MVNO (Mobile Virtual Network Operator), on top of TPG’s entry as Singapore’s fourth mobile-network operator, further adds to the sector’s woes.
“The market seems to have over-estimated M1’s ability to control operating costs in tandem with a decline in service revenue. High customer acquisition costs and the lack of a strategic cost-cutting programme are our key concerns,” adds Mittal.
And while dividend payment has been the most critical factor for M1’s share price performance in the past, earnings and hence dividends (80% payout ratio for FY17) are set to decline sharply in FY19F due to high price tag of $188 million for 700MHz spectrum, resulting in high amortisation costs.
As at 1.19pm, shares in M1 are down 15 cents or 7.1% at $1.95.
