Hello, investors: M1 could still increase dividend beyond its 80% payout ratio

We believe there is room for M1 to increase its dividend beyond its typical 80% payout ratio. After all, the telco paid out 100% of its earnings last year under parameters that were not better than this year’s expectations. First, we expect capex to be lower than last year’s, free cash flow to improve and net debt to EBITDA to be maintained.

In our view, the National Broadband Network (NBN) is also a game changer for M1, as every additional fixed network customer can be expected to bring in a disproportionate increment in profit for the group. Capex for the NBN is borne by the government and the appointed NetCo and OpCo, while RSPs such as M1 can get open access to the network without having to bear any capex. While NBN has got off to a slow start this year, we expect more traction in FY12.

We have a BUY recommendation on M1 with a target price of $2.95, based on 15x FY12F earnings. It is our top pick in the telco sector.