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Can M1 Continue its Winning Run?

M1 Ltd (SGX:B2F) has more than doubled over the last five plus years. The share price alone has recorded returns of about 129% from 1 January 2009 to the closing price on 13 October 2014.

Over the past five financial years, the telecommunications company has also paid out a hefty total of 81 Singapore cents per share in dividends. In comparison, the capital gain returns of the SPDR STI ETF (SGX:ES3), a proxy for the Straits Times Index (SGX:^STI), was 74% for the same duration.

While the returns from M1 has been dialing in success — as Foolish investors, we should look closer to understand what were the business drivers for this move in the share price.

A closer look

The revenue for M1 is divided into four segments. The mobile services segment is made up of post-paid and pre-paid mobile services. Data plans including 4G services are also included in the mobile services segment. The fixed services segment consists of the fibre broadband services. The international call segment includes mobile and fixed line International Direct Dial (IDD) services.

This trio – mobile services, fixed services, and international call services — collectively make up the service revenue for M1.  This is where we should focus on. The handset sales are typically not profitable for M1 as it is subsidising the cost of the handset.

M1 graph 1

Source: Company presentation

Majority of the revenue for M1 predictably comes from its mobile services. For the financial year ended 2013 (FY2013), the mobile services segment made up 63.1% of total sales. For reference, the calendar year aligns with the financial year for M1. The next largest sales contributor is handset sales at 18.7%, while international call services made up 11.3% of FY 2013 revenue. Fixed line services made up only 6.2% of FY2013 sales, however, it is one of the major contributors of revenue growth in the past five plus years. The growth in fixed line services at M1 may be at the expense of Starhub Ltd. (SGX:CC3). The international call services, though, has been gradually declining. For FY2013, the total revenue was lower year-on-year than FY2012, due to lower handset sales.

We would ideally like to see the revenue dollars drip down to the bottom line. For that, we look into the profitability of the service segments.

m1 graph 2

Source: Company Annual Report

M1 does not breakdown the services segment profitability, but we can look at the operating cashflow and capital expenditure to gain some insight from the free-cash-flow for the company. Perhaps what is interesting is that the operating cash-flow for FY2013 is higher than FY2012, despite the lower revenue in FY2013. The operating cash-flow for FY2013 increased partly due to lower cost of goods sold. The main driver behind this was due to lower handset costs.

Finally, Foolish investors would look for the accumulated profits have to end up on the balance sheet in the end. To do this, we look at development of its cash and borrowings.

m1 graph 3

Source: Company Earnings Report

Like most telecommunications companies, M1 has remained in a net debt position throughout the last five financial years. The debt levels have been decreasing, while the cash and equivalents for the company has been increasing which is a good sign. The $250 million loan (as of end of 2013) was refinanced in May 2013 at an effective interest rate of 1.59%.

A quick look ahead

Mobile data made up 28.9% of FY2013 mobile services revenue, up from 24.1% (FY2012). In the age of smartphones, the mobile data service may be the area to make up for losses in revenue elsewhere. Additionally, for FY2013, M1 has been able to keep its mobile customer base stable at 2.1 million customers with a 1.1% churn rate (rate of customers leaving M1).

According to the Infocomm Development Authority of Singapore (IDA – shared by M1), the mobile penetration rate for Singapore was already at 156%. So, we might not want to expect too much growth in users for this segment.

For the fixed line services, M1 has been able to increase the number of fibre customers from 52,ooo to 85,000. Although the average revenue per user (ARPU) dropped from $50.8 to $46.1 per user per month, the overall revenue for the fixed line segment increased. With M1 aggressively lowering prices for fibre connection plans, we should watch for further reductions in ARPU, and how it might affect revenue growth. According to IDA, the fibre penetration rate in Singapore is at 40% so there is some space for growth for the fixed line services here.

In July 2013, M1 also introduced MiBox, its first enhanced internet TV service which offers a-la-carte and on-demand TV content. This is an area worth watching to see if it catches on with its existing fiber broadband customer base. Other consumer services worth watching could be the Deezer Premium+ music services (launched December 2013), and the DBS One Tap virtual credit card which can be used in 30,000 acceptance points in Singapore.

M1 is also venturing into the cloud-based business software-as-a-service (SaaS) sector by offering human resource, accounting website creation and maintenance applications to enterprise customers.

Foolish Take away

As lifelong students of Foolish long term investing, it pays to look closer to understand whether a rise in the company’s share price is supported by the quality of growth that we are looking for.

M1 represents a stable dividend payer with positive free-cash-flow. We should keep an eye out for profitable growth in the fixed line services segments, and increasing contribution from the mobile data services. There may be areas for growth in the MiBox segment, and any other new services which M1 can offer.

On the flipside, the development of its debt should be carefully monitored. As it is for any stable dividend payer, obtaining a good share price might be desirable to continue to achieve market beating returns.

Individual investors who are interested in the company should continue to study other elements of the company, including executive compensation, insider ownership, its competitive landscape and so forth.

As of the closing price on 13 October 2014 of $3.44, M1 traded at a price-to-earnings ratio of around 19.1, and has a dividend yield of around 6.2% (based on a trailing twelve months dividend of 21.2 Singapore cents per share).  For more company analysis and investing tips, sign up here for your FREE subscription to Take Stock Singapore. The Motley Fool’s weekly investing newsletter which will teach you how to invest and to GROW your wealth in the years ahead.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.