M1 First Quarter 2010:I am not seeing what analysts is seeing

Note: Figures mentioned in this report can be found in this M1 Spreadsheet here

So M1 Limited announced first quarter results today.

• Revenue was higher by 33.4%. This is due to the handset sales. iPhone! iPhone! iPhone!
• Expenses was up by 41.4%.iPhone! iPhone! iPhone! One thing you would notice is that handset expense can make up quite a sizable chunk of expenses.
• Cash holdings increase from 7mil to 14 mil. It is still anemic compared to Starhub. Can’t understand why alot of people say their cash position better than Starhub.

Lets take a look at some reporting in detail.

Profit Margin, ROIC and ROE  much lower

ROIC is lower at 10.75%. This is compared to Q1 2009 which is at 29% or last quarter which is at 25%

ROE is lower at 10.23%. This is compared to Q1 2009 at 24% or last quarter which is at 25%.

What this means is that there is a drastic fall off in return on your investment, which ever metric you use. Note that i dun use profits as the numerator but operating cashflow.

Profit Margin declined to 15.78% from Q1 2009 which is 22%. This is also lower than last quarter which is at 17%

Cashflow, Capex and Free Cashflow analysis

Operating cashflow has decline substantially from Q1 2009 from 61 mil  to 30 mil. This is low compared to the 64 mil in Q4.

You will have to go back to Q2 2007 to see a figure lower than that! Whats happening here.

Capex is low at 9 mil. no surprise since looking back, Q1’s capex have usually been low.

No dividends paid out this quarter.

So net net, the current free cashflow is 21 mil. Positive is good but really the declining operating cashflow needs to be monitored.

Mobile Market Share remains constant

Acquisition cost increases

Here is where we see why the profits are taking a hit.

Arpu declining but a shift to mobile data usage

Here is where it gets interesting. You see on your right side a clear indication that there is a shift towards data centric usage. Mobile Data usage increase from 12.7% to 15%.

This is suppose to be good right? But why is ARPU declining in spite of this?

It is likely that usage is up but they can only sell it at base cost price or because of the intense competition, they have got to lower their revenues earn.

This means more mobile data traffic, but less earnings. Not really a good situation if you ask me but we shall look at Singtel and Star hub’s figure to see if this is a prevailing trend.

Capex Guidance is at 120 mil

Ok so the guidance for 2010 capex is at 120 mil. Thats almost similar to 2009’s capex at 119 mil. So if that is the case we are not expecting a drastic reduction in capex like what i predicted earlier.

But they are predicting higher earnings. To me alot of things will depend on the increase earnings attributed to NBN.

Now there are some analyst that are expecting free cashflow of 22 cents per share. Thats why they say there will be a big dividend coming. That will translate to 196 mil free cashflow.

2009 Operating Cashflow = 222 mil

2009 Capex = 119 mil

2009 dividend = 119 mil

2009 free cashflow = 222 – 119 = 103 mil

So 2009 they have negative free cashflow.

So in order for them to have in 2010 196 mil in free cashflow, with capex at 120 mil,their operating cashflow needs to be:

196+120 =  316 mil. This would mean that operating cashflow needs to be increase by 100 mil or 30%.

Summary

If you really buy now for a big dividend, you are really buying that NBN potentially can increase their operating cashflow by 30%

You will also need to monitor a situation where the telcos get too competitive that their capex will increase , operating cashflow will fall due to higher mobile data usage and the need to provide adequate service versus the inability to charge a good price to earn good profits. That is to say profit margin is shrinking (might not be only M1) for the whole industry, free cashflow is shrinking.

In that scenario, as an income investor the whole industry might not provide a good long term yield you are looking for.