7 Things to Note About M1 Limited’s Quarterly Results

M1 Limited (M1) is the smallest local telecommunication company in terms of revenue and market share. As we know, Singapore local telco sector is saturated with the emergence of Mobile Virtual Network Operators (MVNOs) and the impending entry of a fourth telco – TPG Telecom. This has resulted in stiff competition, turning listed telcos from favourites for yield-hungry investors into stocks with a large sell-off seen in past 2 years.

Many investors are naturally concerned about M1’s odds of excelling in a competitive industry, given that all its revenue is derived from Singapore. M1’s recent quarterly earnings have been lacklustre as well.

In this article, we shall look at its latest quarterly report to determine if it can return to its past glory days.

Increase in Revenue

Source: M1 Limited 2Q Earnings Presentation

M1’s revenue comprises Handset Sales, Fixed Services, International Call Services and Mobile Services. On a year-to-year basis, second quarter revenue grew 1.7% to $253 million. This is led by an increased revenue in Mobile Services and Fixed Services but offset by fall in Handset Sales revenue.

Excluding Handset Sales, its Service Revenue derived from its bread and butter communication services actually grew from $184 million in 2Q17 to $193 million in 3Q18. On a half-yearly basis, Service Revenue grew from $363 million to $378 million.

Cost of Sales

Source: M1 Limited 2Q Earnings Presentation

Cost of Sales, on a year-to-year basis, can be said of remained stagnant as it only registered a 0.7% increase. Similarly, on a half-yearly basis, Cost of Sales dropped 2.1%. Handset Costs, being the largest cost segment, were lower both quarterly and yearly.

It seems that M1 was able to control its costs directly related to sales rather well, as seen from a small drop in cost despite a larger revenue.

EBITDA Was a Mixed Performance

Source: M1 Limited 2Q Earnings Presentation

Earnings Before Interest Tax Depreciation Amortisation (EBITDA) for 2Q 18 grew 1.4% year-on-year. On a half-yearly basis, it more or less maintained.

However, EBITDA margin on service revenue actually dropped to 40.6% and 40.7% quarterly and half yearly, despite a smaller Cost of Sales. It is likely due to higher costs incurred for other aspects of operations such as staff salary, facilities expenses and leased circuit.

Capex

Capital Expenditure is an important cost component for a telecommunication company that is capital intensive.

Source: M1 Limited 2Q Earnings Presentation

For 2Q 18, Capex increased 2.8% year-on-year to $28 million. On a half-yearly basis, however, it dropped 34.1% to $51 million.

Cash Flow

Source: M1 Limited 2Q Earnings Presentation

It is also important to look at M1’s cash flow especially the Operating and Free Cash Flow that signifies its ability to pay dividends. Both quarterly and half-yearly Operating Cash Flow registered an increase. Likewise, its Free Cash Flow showed a healthy increase of 222% and 117.4% year-on-year for both quarterly and half yearly.

Customer Base and Average Revenue per User (ARPU)

A total number of customers as of 2Q 18 was 2.164 million. It is worth noting that M1’s postpaid customers have increased in the past 4 quarters to 1.338 million. Market share was 23.6% at end April 2018.

Source: M1 Limited 2Q Earnings Presentation

Postpaid ARPU for 2Q 18 was maintained at $55.60. For 1H 18, it was lower at $55.10. As for the prepaid segment, quarterly ARPU was $10.60 while half yearly ARPU was $10.20.

Outlook

Company management gave some market outlook updates in its earnings announcement and what was the company doing to maintain its competitiveness.

M1 has embarked on early vendor 5G trials, including Singapore’s first 5G end-to-end live trial on June 18. This would prepare the group for future 5G services deployment with technical insights.

The group will continue to leverage on its scaled-up Info-Communication Technology and digital capabilities to capture new opportunities from the Smart Nation Initiative.

It estimated that for the year 2018, Capex would be around $120 million. The management also painted a not-so-positive outlook by saying that second half profit is expected to be lower in view of market seasonality and increased competition.

Conclusion

While M1 showed an increase in revenue in the second quarter of 2018, its earnings and ARPU remained stagnant. The industry is still facing intense competition, with MVNOs coming up with innovative deal bundles that disrupt the existing market dynamics. Furthermore, TPG has not even launched its services yet.

The negative outlook was also confirmed by management who commented that second half profit is likely to be lower than the first half.

It seems that M1 Limited’s business would take much longer to turn around and recoup its share price loss over the past few years.

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