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Why We Chose M1 Among The Singapore Telcos
Corporate Digest | 14 August 2015
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By: Louis Kent Lee
Articles (199) Profile

It is no surprise that we like Telco players. The barriers of entry for this industry is high, oligopolistic industry nature, and the dividend yield is decent, what is there not to like?

In Singapore, there are three main Telco providers. Singapore Telecommunications (SingTel), StarHub, and Mobile one (M1).

In terms of market size, M1 is the smallest among the three providers. This write up will reveal why size should not be the only thing you should be looking at with your investment lenses when it comes to evaluating the local Telcos.

Steady Mobile Service Segment

Like its incumbents, M1 provides both mobile (voice and data) and fixed fibre broadband services. In its mobile service, M1 offers both post-paid (normally a 2-year contract) and pre-paid services.

Within the mobile services space (post-paid), M1 commands some 23.1 percent market share.

Seen in table 1; M1 has done a relatively good job maintaining its post-paid customers base, with steady increases in the number of post-paid mobile customers, post-paid average revenue per user (ARPU), and corresponding increases in its mobile service revenue.

Source: Company annual reports

Overall Sticky Fibre Broadband Base For Telcos

Other than the 3 Telco players that offer fixed fibre broadband services, there are other retail service providers (RSPs) that also offer such fixed fibre broadband services.

There are roughly some 20 RSPs in Singapore that offer a variety of access plans for residential and enterprise users.

The core advantage that the Telco players have over the other RSPs is that they are able to provide a compelling service bundle with their mobile services, and this makes their existing customers extremely sticky.

This is a point that RSPs fail to compete effectively on and will continue being a core competitive advantage of the Telcos.

M1 currently has some 114k subscribers for its fixed fibre broadband services. Given the penetration rate of some 50 percent for fibre broadband in end 2014, the adoption rate of fibre is expected to continue and provide tailwinds for growth to all three Telco players, including M1.

No Cable-TV Service, No Biggie

While it is true that SingTel and StarHub have the ability to bundle packages of mobile services, fibre broadband services, and that of Cable-TV services together, it is not true that M1 is entirely losing out in any way whatsoever.

The Cable-TV industry is already entering into a sunset mode, and whilst M1 does have its MiBox service, it is essentially spared from the burden of legacy, which SingTel and StarHub will need to deal with, especially on the infrastructure previously paid, which was needed to deliver the content.

Operationally, M1 is also the best and most efficient among the two other Telcos.

Table 2 shows the metric that tracks such efficiency; EBITDA margin against service revenue.

Source: Company reports M1 (1H15), SingTel (FY15 Mar quarter), StarHub (1Q15)

It is notable that this efficiency and corresponding increases in ARPU, mobile service revenue, is achieved without having the option of the Cable-TV allure within its bundle, something that SingTel and StarHub has aggressively advocated in their packages.

Data Trend And The New mySim Plan

We are in the era of witnessing a significant explosion happening in the data arena, and increasingly seeing Telcos shifting their revenue reliance over to data.

After all, it is nothing new to hear voice revenue sliding. It was the same thing we witnessed for the replacement of data/wifi enabled messaging applications like whatsapp, completely wiping off the relevance of sms revenue at one point.

There’s a reason why Telcos are cutting mobile plans’ data cap from the generous 12GB per month usage, to the 2-3GB per month data entitlement band in mobile plans these days. Simply put, more revenue will be expected to come from this space moving forward.

Table 3 shows the increasing contribution, and thus the next important factor of growth, for M1’s service revenue.

Source: Company reports

Leveraging on this front, the new plan launched by M1 less than a month back, dubbed mySim, offers 5GB of data and 300 minutes of talktime, at a basic monthly rate of $30 for a 12-month term.

This is effectively targeting the new trend of users who buy smartphones directly from the brands themselves or via online mediums.

Should subscribers choose a one-month plan instead, the same price will entail 3GB of data and 300 minutes of talktime.

I see this plan particularly attractive because a) M1 will not have to incur handsets subsidies for customers signing up for this plan and b) offers the flexibility of a pre-paid (for the one-month plan) but also encourages a conversion to a 12-month plan.

Fourth Telco Player, Concerns?

Now that everyone already know about the fourth telco player in Singapore; MyRepublic (MR), the natural question is what impact can we foreseeably infer on the existing telco players?

MR is expected to launch commercial services in the mobile space beginning mid-2017. We opine it will not be easy for MR to snap up market share from the existing players as a) MR is not opting for a price disruptive strategy to enter into the space, b) customers of existing players are usually sticky (bundling strategies) or tied to a 2-year contract, c) not as strong network quality/coverage.

We feel that possible pressure on M1 will be felt, considering it being the smallest among the current telco players, but not significant.

Apart from heavy capital expenditure needed to meet the quality of service criteria imposed by IDA and thinking of ways to get the sticky customers from existing telco players over, MR will have a lot to do to significantly dent the rice bowls of the existing telcos.

That said, it is notable that MR currently holds some 5 percent of the fibre broadband market in Singapore.

Financial Stability, Dividend Yield

Though the growth rate of revenue and net income over the past three years of M1 have been relatively flattish, profitability metrics tracked by us showed us good stability overall.

Return on assets, crucial for capital expenditure heavy companies like telcos, have exhibited consistency around 13 percent over the past three years. This is a good sign of asset utilisation.

Return on capital (ROC) and return on equity (ROE) are also consistently high, averaging around 20 percent for the past five years (ROC) and close to 50 percent for ROE over the past five years.

Although M1’s net debt to earnings before interest, taxes, depreciation and amortisation (EBITDA) stands at some 0.9x, M1’s interest cover of 74x is the highest among its peers (SingTel: 16.7x , StarHub: ~32x).

This denotes M1’s superior ability to pay off any short term debt. This is due to M1’s effective interest rate being low at around one to two percent, resulting in lower interest expenses, while its peers’ effective interest rates are at around three to four percent.

The average dividend per share paid out by M1 over the past 5 years stand at around 17.6 cents.

At the time of writing, M1’s yield is currently trading at 6.3 percent, which is higher than its average 5.9 percent and higher than that of SingTel (4.4 percent) and StarHub (5.2 percent).

Louis is a qualified accountant with the ACCA, and is the Research Editor at Shares Investment magazine.

Please click here for more information about this author.

StarHub  1.290 +0.010 +0.78%   
Business: [FY18 Turnover] Mobile (34.9%), sale of equipment (22.4%), enterprise fixed (21.6%), pay TV (13.2%), broadband (7.9%).

Insight: May-19, 1Q19 total revenue rose 6% to $596.8m attr... Read More
Singtel  3.150 -0.01 -0.32%   
Business: Asia's leading communications group. [FY19 Turnover] Mobile Comm (31.1%), Data & Internet (19.2%), Infocomm Technology (17.5%), Sale of Eqmt (16.5%), Digital Biz (7.2%), Fixed Voice (5.2%), Pay-TV (2.1%), Leasing (0.8%), others (0.4%).

Insight: May-19, FY19 operating revenue remained flat at $1... Read More

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