Why M1 is poised to beat rivals in 2014 earnings race

Here are 4 big reasons.

According to maybank Kim eng, its top telco pick for 2014 is M1. It is expected to post the fastest earnings growth among the three telcos under our coverage.

Maybank noted that potential catalysts are: (1) earnings upside from faster-than-expected monetisation of tiered data usage, (2) improving margins from lower subscriber acquisition costs, (3) BPL cross-carriage giving M1 a unique opportunity to jumpstart its fledgling Pay TV business, and (4) the potential for a higher dividend payout. Reiterate BUY with DCF-derived target price of SGD3.98.

Here's more:

2014: Another data-driven year. We expect M1 to follow up its 2013 double-digit earnings growth with another year of good growth (our forecast: 8%) in 2014. We see several catalysts that could energise its
bottom line.

Mobile data monetisation to accelerate. Data contribution, which has grown 4ppts to 42.3% of service revenue since the start of 2013, should jump to 48% by end-2014, driven by robust take-up of 4G data plans. 32% of M1’s postpaid subscribers have switched to tiered plans and this could reach 45% by end-2014.

M1 expects 80% of its postpaid base to switch, with the rest on 3G and enjoying the untiered 12GB data cap. But as apps get more data-intensive, it is possible that as high as 90% of its postpaid base will switch by 2015.

Margins to benefit, be it iPhone or Android. Currently at 38% for 9M13, we expect service EBITDA margin to improve to 40% in 2013F and 41.4% in 2014F.

For M1, more sales of the iPhone will lift its margins as iPhone subsidies are treated differently from Android phones; they are not expensed but amortised over the duration of the user contracts. But the lower subsidies for Android phones, should they sell in bigger volumes, will also benefit M1. Either way, M1 wins.

Getting BPL would be a coup for Pay TV ambition. M1 may be able to cross-carry BPL by mid-2014 if it gets the 10,000 subscribers needed to qualify. This could push its fledgling miBox TV service, which is the cheapest in town at SGD8 a month, into the mainstream.

More dividends expected. M1’s net debt/EBITDA has fallen to a very low 0.6x. With more clarity on its capex for 2014, which is expected to stay the same as 2013 including a SGD40m spectrum outlay, we think M1 can afford to pay out more dividends.

For now, we keep our 2014F DPS forecast at 80% of earnings but M1 could very well pay up to 100%. Projected FCF of SGD167m with a bit of gearing would be enough to fund a 100% payout of SGD183m. Assuming a 100% payout, dividend yield would be 6.2%.