MobileOne (M1)

7 Jan 2009

Neil Montefiore shocked everyone when he resigned from his CEO position at M1 last week, signaling the end of a reign that lasted 12 years. CFO Karen Kooi has stepped up to take over as acting CEO while M1 searches for a new head, but what kind of CEO is the board looking for?

It definitely has to be someone who will exhibit a different leadership and vision from Montefiore, who left M1 when it was starting to transform to a different company from what it was in the late '90s. The new leader has to make M1 bigger, more competitive, and a lot more serious than the 'fun' image that it has always portrayed.

But before we delve further into the future, let's look at the past and present to assess where M1 is currently standing.

What kind of legacy has Montefiore left behind?

He joined M1 at the very beginning in 1997 and then took it public in 2002. Back then when there were only two telcos in Singapore, Montefiore led M1 to settling comfortably into second spot behind SingTel. Then in 2000, Starhub entered the arena and bombarded the market with free incoming calls, per-second billing and free Internet dial-up access for everyone.

M1, with no Internet services and therefore no bundling capability to speak of, had no answer to Starhub's aggressive promotions. Starhub stole the number two spot and M1 was relegated to third place in 2005.

In fact, we have noticed that almost every time it is mentioned in the media, it is referred to as Singapore's "third" or "smallest" telco. This is not a very good position to be in from a branding point of view. In fact, the only branding niche it has managed to carve out for itself after more than a decade in business is as Singapore's "most exciting and innovative" mobile provider.

Also, after going public, M1's revenue growth slowed to less than 10%, and was stuck at around S$700m for five years. Although its churn rate has been very stable (it was 1.6% in FY2004, 1.5% in FY2005 and FY2006, and 1.2% in FY2007), it has been increasing this year. It was 1.3% in Q1, 1.5% in Q2 and 1.8% in Q3.

The churn rate refers to the number of customers moving from one telco to another – a stable churn rate, like what M1 exhibited for the past few years, is considered desirable. M1's churn rates for FY2008 so far has been disappointing due to the mobile number portability introduced earlier last year, which was expected to stir up churn rates for all the telcos.

But SingTel and Starhub experienced stable churn rates when mobile number portability was launched and only M1 has seen more subscribers leaving.

High churn rates aside, M1's net profit has been steadily rising over the years, although it posted a decline in net profit for Q3 2008 and is poised to post an annual drop in earnings for FY2008. At least under Montefiore, M1 has remained largely free-cash-flow-positive and has managed to keep its debt low, below S$300m, since its IPO.

Montefiore has left M1 in an unenviable position. Although it is looking to the future to transform itself into a multi-play provider, it currently does not provide any Internet or TV services, and still has no bundling capability in the short-term. It is losing subscribers to SingTel and Starhub. And unlike SingTel, it has no revenue streams from overseas to make up for its lesser performance in Singapore.

It cannot move forward as quickly as it likes because everything seems to hinge on the successful completion of the National Broadband Network (NBN). And that's expected only in 2011. In the meantime, it just needs to adjust its tactics quarter-to-quarter to try to win back subscribers while it finds a new CEO.

DBS Vickers released its Regional Equity Strategy report on December 23, maintaining its BUY call on M1. Analyst Sachin Mittal thinks M1 is a good company that can ride the turbulence with its attractive valuations and free cash flow.

What's even better, M1 stands to gain from entering the fixed broadband sector through NBN. SingTel now has an advantage with the upcoming new broadband network, and it will definitely leverage it to lure Starhub's cable Internet and TV subscribers. This would be sweet revenge as its relatively new mioTV service has been performing awfully compared to Starhub.

For its opportunity to expand its offerings to become on par with Starhub and SingTel, DBS Vickers has a BUY call on M1 with a price target of S$1.34.

The new CEO of M1 has a lot on his or her hands in order to help the telco make a difference in Singapore's small and mature market. After all, M1 claims in its annual report that it is about fun, creativity and boldness, among other things.

M1 also need to consider expanding overseas. SingTel benefited from this strategy under the stewardship of former CEO Lee Hsien Yang. M1 could start by looking at the emerging markets in the region. Shareholders won't be too excited at the prospect of a company that's fighting for market share in a saturated local market where mobile penetration is 130%.

With the NBN, M1 is now given a new lease of life to compete with SingTel and Starhub. It has to make full use of the opportunity, or it'll be known as that small, fun telco that is going nowhere.

Analysts surveyed by Reuters have on average an OUTPERFORM call on M1 with a target price of S$2.23. In the last 12 months, its stock price has dropped just 21% to S$1.50.

As always, please see your licensed financial advisor before making any investment decisions.

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