• Stock has declined 40% since Feb 2015; now trading at 13x FY16F PE, cheapest in the region 
• Very attractive risk/reward ratio with potential risk of -5% versus total returns of +40% 
• Upgrade to BUY on revised TP of S$ 2.60

The stock has declined 40% since Feb 2015; cheapest in the region at 13x FY16F PE. M1's share price has declined in anticipation of the entry of a fourth mobile player. Our TP of S$2.60 factors the impact of potential new entrant on M1. While a spectrum auction is scheduled in 3Q16, the big question is if the interested players can raise adequate funds for the network rollout before the auction. Conversely, if there is no fourth telco entry, M1 could benefit the most as reflected in our bull-case TP of S$3.30 implying potential returns of c.40%. Under our bear-case scenario of an overly aggressive new entrant, we see potential return of -5% based on our bear-case TP of S$2.15.

In the absence of domestic roaming, potential new entrant will need to cover the entire island from scratch. U Mobile in Malaysia, for example, managed to capture 5% revenue share in 2014, after seven years of its launch in a prepaid dominated market. Singapore is a postpaid dominated market with 18-24 months contracts and our assumption of a 6% revenue share for the new entrant in 5-years is reasonably optimistic.

Our key projections. Our base-case projects M1's cellular revenue to drop 15% by 2022 versus 2015. This will lead to a 20% drop in net profit to S$143m by 2022, partially offset by lower handset subsidies. Based on 80% payout ratio, M1's dividend yield is projected to be ~5% in 2022. Under our bearcase scenario of an overly aggressive new entrant, we assume a 20% drop in service revenue by 2022, leading to a 28% drop in M1's profit to S$129m by 2022. Under our bull-case scenario, we assume non-entry of a new player and stable profits. Valuation: We upgrade M1 to BUY on DCF-based TP of S$2.60 (WACC 6.8%, terminal growth 0%) as we slightly tweak our long term revenue and capex assumptions. BUY for potential return of 14% including 6% yield as negatives are already priced in.

Source: DBS Vickers - 6 June 2016