Can M1 survive telco wars with its fixed and IoT revenue?

Fixed and IoT revenues are expected to double their contribution from 12% currently to 24% by 2020.

M1, like its rival telcos, is expecting a decline in revenue share amidst the competition from incoming entrant TPG and mobile virtual network operators (MVNO).

DBS Equity Research said in a forecast that M1 could record revenue share losses of around 1.3% over 2017-2022. Analyst Sachin Mittal commented, “Growing contributions from Circles.Life, M1’s MVNO partner, and M1’s cheaper mobile SIM only plans with equipment should allow M1 to minimise revenue share losses over the period in our view.”

“With the potential average revenue per user (ARPU) dilution from SIM-only plans and subscriber losses, we project for a 4% annual decline in M1’s mobile revenues over 2018- 2022, in line with our industry base case, vs. 3% earlier,” he added.

Meanwhile, growing contributions from M1’s fixed and IoT segments could offset declines in the mobile segment, allowing M1 to expand its overall topline despite the 4% projected annual decline in the mobile segment.

Fixed and IoT revenues are also expected to double their contribution from 12% currently to 24% by FY2020, much of it derived from the fast-growing IoT segment.

“The success of M1’s partnerships with digital solution companies to capture opportunities in the Smart Nation project powered by IoT should allow M1 to expand its topline further going forward,” Mittal said.

The analyst forecasted that that IoT will contribute to ~10% of total revenue and generate ~10-15% operating margins in FY2021. “However, given the low EBITDA margins of these services, we do not expect the incremental EBITDA contributions from these segments to be substantial enough to offset the potential impact of declines in the mobile segment on M1’s EBITDA,” he added.

Moreover, even if M1 has maintained its dividend payout ratio at ~80% over the last three years, the absolute dividend per share has declined due to the fall in earnings of the carrier.

“NB-IoT initiatives and fixed services revenue failing to meet revenue expectations due to competition and low enterprise customer net additions, coupled with potential cost escalations (staff- and project-related costs to grow enterprise business) causing earnings to decline further, could result in lower dividends,” Mittal added.