UOB KayHian: M1’s diversification has taken on new urgency

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UOB KayHian is sticking with a Sell call on M1 after attending the telco’s investor day.

M1’s mainstay mobile business faces stiff competition from the impending entry of TPG Telecom as the fourth mobile operator in
the second half of 2018. Thus, diversification to newer pastures has taken on greater urgency,” the brokerage said in a note on Tuesday. “However, the new ventures require gestation period to scale up. While earnings contributions are likely to be positive, their margins are lower and would drag overall margins lower.”

UOB KayHian noted that mobile, fixed network services and corporate ICT and digital services contributed 76.7 percent, 16.8 percent and 1-2 percent of service revenue respectively in the fourth quarter of last year.

“Management sees corporate ICT/digital services as a new growth engine. It envisages its revenue mix to shift toward 60:20:20 in future. M1 is looking at acquisitions in complementary and adjacent businesses to achieve the desired revenue mix,” the note said. Management plans to focus on three areas: managed infrastructure and cyber security, smart nation services and cloud computing and data analytics, the note said.

The brokerage noted M1 has managed to secure several multi-year contracts from government agencies and large corporations, including managing secured WAN connectivity for schools and WiFi connectivity for the Land Transport Authority.

But UOB KayHian kept a Sell call with a S$1.60 target price, pointing to the large portion of its service revenue from the mobile business.

The stock is down 1.14 percent at S$1.74 at 11:15 A.M. SGT on Wednesday; that’s in line with the Straits Times Index’s 1.19 percent fall.