Shares pricing in declining dividends to perpetuity: Using a GordonGrowth model with 9% cost of equity, the shares are currently pricing in a 2%decline in dividend streams to perpetuity from the FY08 base dividend ofS$0.138. Despite aggressive cuts in our forecasts, we see earnings anddividends recovery from FY11 and as such, the shares look undervalued.

Declining earnings outlook is in the price: We are forecasting EBITDACAGR (2007–10E) decline of 5% on both revenue and margins pressure. ForFY09, we look for a 13% drop in net profit on a 5% decline in revenue and130bp drop in EBITDA margin. M1 has little room to cut costs and as such ithas little buffer to protect its cashflows from any revenue shortfall.

Launch of unified cross-border plans a key catalyst: The potential launchof unified price plans across Singapore and Malaysia in 2009 could allow M1to leverage its relationship with Celcom (unlisted) and differentiate its servicesfrom other operators. This initiative encountered delays in the past, but wethink if implemented, will provide the M1 with a good arsenal to defend itsmarket position in Singapore.

National broadband network – all about defending turf: We view M1’sentry into the resale segment in the fixed broadband market as well as thegovernment national broadband network projects as tools that will enable it todefend its postpaid subscriber base.

Our DDM-derived target price translates to an FY09E PER of 12.3x andEV/EBITDA of 6.6x. With over 31% upside to our target price, we formallyupgrade the stock to Outperform.

Relative illiquidity of the shares is a practical constraint especially for largefunds and we have not factored in any liquidity discounts when arriving at ourtarget prices. We believe investors with liquidity constraints should look toaccumulate the shares at appropriate entry price levels.