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M1 Ltd’s Latest Earnings: Headwinds Continue

Telecommunications services provider M1 Ltd  (SGX: B2F) reported its fiscal third-quarter earnings yesterday evening. The reporting period was for 1 July 2015 to 30 September 2015.

M1 is the smallest player within Singapore’s telco sector, sitting in third place behind Starhub Ltd  (SGX: CC3) in second spot and Singapore Telecommunications Limited  (SGX: Z74).

M1 groups its business under four segments, namely, mobile services, fixed services, international services, and handset sales. The first three are collectively known as services revenue.

You can learn more about M1 in here and look at its last quarter’s earnings here.

Financial highlights

The following’s a quick rundown on M1’s latest figures:

  1. Overall revenue in the third-quarter for M1 rose by 11% year-on-year to $278 million. This was mainly driven by a 70% jump in handset sales.
  2. However, quarterly services revenue fell by 1% to $205 million compared to a year ago.
  3. Handset sales carry lower profit margins than services revenue. But the spike in the former was enough to overcome the dip in the latter for M1’s net profit for the reporting quarter to inch up by 0.8% to $44.9 million.
  4. Subsequently, earnings per share (EPS) was 4.8 cents, unchanged from the third-quarter in the previous fiscal year.
  5. Cash flow from operations came in at $78 million for the third-quarter of 2015 with capital expenditures clocking in at $26.4 million. This gives M1 positive free cash flow of $51.6 million for the quarter, down from the figure of $67.2 million seen a year ago ($106.6 million in cash flow from operations and $39.4 million in capex).
  6. As of 30 September 2015, M1 had $26.1 million in cash and equivalents and $351.1 million in debt. This leaves M1 with a net debt position of $325 million – that’s a weaker position compared to end-2014 when it had a net-debt position of $279 million.

In all, headwinds in M1’s services revenue continued in the reporting quarter. Along with this, M1’s free cash flow had fallen while its balance sheet had weakened. Let’s look a little deeper to understand the source of M1’s challenges.

Operational highlights

Mobile services’ revenue saw a 1.2% dip mainly due to lower prepaid revenue. M1’s pre-paid customer base saw a quarter-on-quarter decline of 3,000 customers to 711,000. On a brighter note, M1’s post-paid customer base increased by 11,000 from the preceding quarter to 1.18 million.

The stalled services revenue meant that M1’s overall market share (including the post-paid and pre-paid markets) had dipped from 23.3% in the third-quarter of 2014 to 23.0% in July 2015. M1 managed to maintain its post-paid churn rate (rate of customers leaving) at 1%, unchanged from the quarter before.

Meanwhile, the fixed services segment saw a 22% year-on-year increase in revenue. Revenue for the segment was helped by a 22% pop in fiber broadband subscribers to 120,000. Average revenue per user (ARPU) also rose by 5.1% year-on-year.

In sum, M1’s difficulty lies in its ability to hold onto existing customers in its post-paid mobile market. The company is expecting low single digit growth in net profit after tax for 2015.

Foolish summary

As of yesterday’s closing price of $2.90, M1’s selling for15.2 times its trailing earnings and has a trailing dividend yield of around 6.5%.

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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.