Broker's take: DBS downgrades M1 as major shareholders shelved plans to rid stakes

DBS Vickers Securities on Wednesday downgraded M1 after the telco posted disappointing second quarter results and its three major shareholders, with a combined stake of 61 per cent, called off a strategic review of their stakes.

"We have removed the 25 per cent mergers and acquisitions premium from our discounted cash flow (DCF) valuation as M1's major shareholders...have announced that they are not going ahead with a strategic review to dispose of their stake,'' DBS analyst, Sachin Mittal, said.

Mr Mittal added that due to the higher-than expected handset subsidy costs and other operating costs, DBS has cut its earnings forecast for fiscal years 2017 and 2018 by 12 and 11 per cent, respectively.

He also highlighted that 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, added to the sector's woes.

"Weak 2Q17 and 3Q17F results even before the actual launch of operations by TPG (expected in late 2017) could lead to further downward revision in consensus earnings and the valuation of M1, in our view,'' Mr Mittal said.

On M1 as a dividend play, he cautioned that "earnings and hence dividends (80 per cent payout ratio for FY17) are set to decline sharply in FY19F due to high price tag of S$188 million for 700MHz spectrum (yet to be paid), resulting in high amortization costs''.

On Tuesday, M1 reported that its second-quarter net profit dropped 20.8 per cent on higher depreciation, interest expense, and other factors. Net profit for the three months ended June 30, 2017 stood at S$32.5 million, down from S$41 million a year ago.

M1 hit S$1.915 a share on Wednesday, and was hovering around S$1.950, down 15 Singapore cents, or 7.143 per cent by 12:49pm. More than 13 million shares changed hands.