M1 (formerly: MobileOne)

[halopanda]

M1 released its full year results with a significant decline in earnings

Here are my humble thoughts on M1:

https://katongoracle.blogspot.sg/2017/01/m1.html

[CY09]

Hold the view that M1 is fairy valued.

For this FY, I am still expecting a decline in EPS for the full year earnings (14 cents EPS).

However, i don't expect M1 to reduce dividends correspondingly (expected div of 0.12). This is because its parent companies (Keppel T&T and Keppel Corp) are in need of money. Keppel Corp has taken 1 billion more of debt this FY alone and soon it has to pay it off (unless DBS is so charitable to extend maturity of the term loan)

[halopanda]

Hold the view that M1 is fairy valued.

For this FY, I am still expecting a decline in EPS for the full year earnings (14 cents EPS).

However, i don't expect M1 to reduce dividends correspondingly (expected div of 0.12). This is because its parent companies (Keppel T&T and Keppel Corp) are in need of money. Keppel Corp has taken 1 billion more of debt this FY alone and soon it has to pay it off (unless DBS is so charitable to extend maturity of the term loan)

M1's payout ratio for the past 2 financial years has been 80.5%. Final div for this year has even been adjusted and reduced to meet this ratio. Assuming this payout ratio does not change, this would work oit to 0.11 based on your reduced expected earnings of 0.14 eps. M1's fluctuating dividend history seems to suggest that they are more inclined to pegging div payout to earnings rather than maintaining a fixed dividend like Starhub (0.05 per quarter) or perhaps Singtel.

Of course, there is always a possibilty that they maintain their dividends like you have mentioned but that would mean a implementing a higher payout ratio (which is still in line with their policy of having a payout ratio of 80%).

Just my humble opinion. Cheers bro.

[weijian]

M1's payout ratio for the past 2 financial years has been 80.5%. Final div for this year has even been adjusted and reduced to meet this ratio. Assuming this payout ratio does not change, this would work oit to 0.11 based on your reduced expected earnings of 0.14 eps. M1's fluctuating dividend history seems to suggest that they are more inclined to pegging div payout to earnings rather than maintaining a fixed dividend like Starhub (0.05 per quarter) or perhaps Singtel.

Of course, there is always a possibilty that they maintain their dividends like you have mentioned but that would mean a implementing a higher payout ratio (which is still in line with their policy of having a payout ratio of 80%).

Just my humble opinion. Cheers bro.

For companies like M1 that requires high capex to purchase the relevant fixed assets to ensure business continuity, it might not be appropriate to believe dividend/net profit < 1 payout ratio is sustainable. Rather, the appropriate metric to be used might be dividend/free cash flow instead. M1 seems to have been paying dividends above FCF for the last 3 years now (2014:135%, 2015:190%, 2016: 105% of FCF), due to large capex layout in the last few years and since it doesn't print money (like the Fed does), the past will come back to bite in the future (in terms of high interest cost to service the loans and high depreciation costs).

[weijian]

It is a (advance) cost of sales where they will collect the sales amount by 24 monthly installment for a 2-year plan. For example if they sell a $1,300 phone to you at $100 with a 2-year plan, the telco will collect the balance of $1,200 by 24 months installment of $50 each month. If the service is worth $20 per month so telco will add $50 and make the plan as $70 per month for 24 months plan with penalty for cancellations of plan short of the contracted 24 months. Of course, the $1,300.00 phone is included their sales profit.

Telco have to purchase the phone upfront and paid the full amount (say, $700 cost) to the vendor such as Apple or Samsung or Sony etc. when getting the phones.

I must add here that it is a good thing this "handset component" increased, means they got many to sign up and contracted the 2-year plan. The more, the merrier as more consumers are tied down by contracts and the almost guaranteed profit will roll in for the next two years except those delinquent customers which needed to be dealt with in the courts for breaking contracts or not paying the monthly dues.

Hi, just to clarify, say the telco purchase the phone upfront for cost of $480 from Huawei, is the $480 recognized one off or is it recognized over the 24 months contract at a cost of sales of $20 per month?

It might be aggressive accounting for the latter. As i don't know the answer too, i decided to take a look.

Based on M1 AR15,
- Under "Summary of significant accounting policies" 2.22 (pg. 118), it is stated "Customer acquisition costs are accounted for in profit or loss when incurred". Hence i suspect it might be the former.
- From the breakdown of operating revenue and operating expenses (pg. 120 and 121), "cost of handsets sold" expenses are higher than "handset sales" revenue and so the former looks to be about right.
- Finally, i reviewed the depreciation portion and did not manage to see anything related to handset subsidies/customer acquisition costs in there. The only amortization stuff were license/spectrum rights.

[halopanda]

M1's payout ratio for the past 2 financial years has been 80.5%. Final div for this year has even been adjusted and reduced to meet this ratio. Assuming this payout ratio does not change, this would work oit to 0.11 based on your reduced expected earnings of 0.14 eps. M1's fluctuating dividend history seems to suggest that they are more inclined to pegging div payout to earnings rather than maintaining a fixed dividend like Starhub (0.05 per quarter) or perhaps Singtel.

Of course, there is always a possibilty that they maintain their dividends like you have mentioned but that would mean a implementing a higher payout ratio (which is still in line with their policy of having a payout ratio of 80%).

Just my humble opinion. Cheers bro.

For companies like M1 that requires high capex to purchase the relevant fixed assets to ensure business continuity, it might not be appropriate to believe dividend/net profit < 1 payout ratio is sustainable. Rather, the appropriate metric to be used might be dividend/free cash flow instead. M1 seems to have been paying dividends above FCF for the last 3 years now (2014:135%, 2015:190%, 2016: 105% of FCF), due to large capex layout in the last few years and since it doesn't print money (like the Fed does), the past will come back to bite in the future (in terms of high interest cost to service the loans and high depreciation costs).

The dividend policy of paying at least 80% of earnings was laid out in their presentation slides. Dividends were also paid out according to this policy for FY15 and FY16

[weijian]

M1's payout ratio for the past 2 financial years has been 80.5%. Final div for this year has even been adjusted and reduced to meet this ratio. Assuming this payout ratio does not change, this would work oit to 0.11 based on your reduced expected earnings of 0.14 eps. M1's fluctuating dividend history seems to suggest that they are more inclined to pegging div payout to earnings rather than maintaining a fixed dividend like Starhub (0.05 per quarter) or perhaps Singtel.

Of course, there is always a possibilty that they maintain their dividends like you have mentioned but that would mean a implementing a higher payout ratio (which is still in line with their policy of having a payout ratio of 80%).

Just my humble opinion. Cheers bro.

For companies like M1 that requires high capex to purchase the relevant fixed assets to ensure business continuity, it might not be appropriate to believe dividend/net profit < 1 payout ratio is sustainable. Rather, the appropriate metric to be used might be dividend/free cash flow instead. M1 seems to have been paying dividends above FCF for the last 3 years now (2014:135%, 2015:190%, 2016: 105% of FCF), due to large capex layout in the last few years and since it doesn't print money (like the Fed does), the past will come back to bite in the future (in terms of high interest cost to service the loans and high depreciation costs).

The dividend policy of paying at least 80% of earnings was laid out in their presentation slides. Dividends were also paid out according to this policy for FY15 and FY16

hi halopanda,
You might have not gotten what my post is about. I am not challenging that M1 is not paying at least 80% in net profit. On the contrary, I am skeptical whether this dividend policy is sustainable or not. It's not about listening to Mgt talk/presentation, it is about independently calculating the numbers based on common sense. For example, most business trusts (with limited span assets) pay their dividends out of FCF, based on their mandate. They have purported low-teen dividend yields but most people know it is not sustainable because there is a partial return of capital in the return of investment.

AND more importantly, i suspect net profitability may be in for a rude surprise in the next few years. So all calculations of dividend based on net profit will also get thrown off if my suspicion materializes. As a prudent investor, using FCF rather than net profit as a benchmark, may eventually provide calculations that serve a better margin of safety.

Disclosure: i am not vested in M1.
P.S: When benchmarking historical payouts, i look at both % of net profit and FCF.

[halopanda]

M1's payout ratio for the past 2 financial years has been 80.5%. Final div for this year has even been adjusted and reduced to meet this ratio. Assuming this payout ratio does not change, this would work oit to 0.11 based on your reduced expected earnings of 0.14 eps. M1's fluctuating dividend history seems to suggest that they are more inclined to pegging div payout to earnings rather than maintaining a fixed dividend like Starhub (0.05 per quarter) or perhaps Singtel.

Of course, there is always a possibilty that they maintain their dividends like you have mentioned but that would mean a implementing a higher payout ratio (which is still in line with their policy of having a payout ratio of 80%).

Just my humble opinion. Cheers bro.

For companies like M1 that requires high capex to purchase the relevant fixed assets to ensure business continuity, it might not be appropriate to believe dividend/net profit < 1 payout ratio is sustainable. Rather, the appropriate metric to be used might be dividend/free cash flow instead. M1 seems to have been paying dividends above FCF for the last 3 years now (2014:135%, 2015:190%, 2016: 105% of FCF), due to large capex layout in the last few years and since it doesn't print money (like the Fed does), the past will come back to bite in the future (in terms of high interest cost to service the loans and high depreciation costs).

The dividend policy of paying at least 80% of earnings was laid out in their presentation slides. Dividends were also paid out according to this policy for FY15 and FY16

hi halopanda,
You might have not gotten what my post is about. I am not challenging that M1 is not paying at least 80% in net profit. On the contrary, I am skeptical whether this dividend policy is sustainable or not. It's not about listening to Mgt talk/presentation, it is about independently calculating the numbers based on common sense. For example, most business trusts (with limited span assets) pay their dividends out of FCF, based on their mandate. They have purported low-teen dividend yields but most people know it is not sustainable because there is a partial return of capital in the return of investment.

AND more importantly, i suspect net profitability may be in for a rude surprise in the next few years. So all calculations of dividend based on net profit will also get thrown off if my suspicion materializes. As a prudent investor, using FCF rather than net profit as a benchmark, may eventually provide calculations that serve a better margin of safety.

Disclosure: i am not vested in M1.
P.S: When benchmarking historical payouts, i look at both % of net profit and FCF.

@weijian Ok I see what you were driving at now. That's an interesting and valid perspective.

[YMPL]

Published CapEx of M1, contains more than replacement CapEx. I would suggest using depreciation & amortization expenses, as a proxy to estimate the replacement CapEx. The high published CapEx in the last few years was due to non-recurring spectrum renewal cycle, and data center investment.

The last five-year average "replacement CapEx" (based on depreciation and amortization) is S$117 million, with average OCF S$285 million. The average FCF should be around S$168 million.

Average dividend paid over the same period, was S$154 million, with a ratio of ~90%

M1 profitability is declining with keener competition ahead. Big Data technology might make a difference in near future with quality data owned by operators. TPG's boss wouldn't spend billion to enter a sector unless promising outlook ahead, IMHO.

(vested)

[edragon]

 TPG's boss wouldn't spend billion to enter a sector unless promising outlook ahead, IMHO.

(vested)

So, on that same score, IDA would not have called for Expression of Interest and thereafter Tender if the market cannot sustain a fourth Telco?