SINGAPORE (Jan 25): UOB Kay Hian says the probability of M1 and StarHub sharing a common 5G radio access and backhaul transmission network to save cost is high, as both companies use Huawei and Nokia equipment.

In its results briefing, management says it is committed to work together with its rival, although it is too early to estimate the potential costs savings. They also indicated that it takes 18-24 months to roll out a new mobile network.

“With the mobile landscape getting more competitive, M1 and StarHub are forced to collaborate,” says analyst Jonathan Koh in a Wednesday report. “Reiterate buy with target price at S$2.48.”

M1 reported net profit of S$31.8 million for 4Q16, which came in line with UOB’s forecast of S$31.1 million.

(See also: M1 posts 16.1% fall in FY16 net profit to S$149.9 mil)

M1’s mobile business saw a soft sequential bounce. The telco added 15,000 post-paid and 10,000 pre-paid subscribers. Post-paid ARPU was still under pressure at S$57.10 due to lower contribution from roaming. Prepaid ARPU receded 4.2% q-o-q due to lower usage for voice. Data traffic increased by 9.1% y-o-y to 3.6GB/user. Data contributed to 54.8% of mobile service revenue.

Meanwhile, fixed network services saw a steady expansion. M1 added 8,000 fibre broadband subscribers. ARPU softened by 5.7% q-o-q to S$43.10, due to promotions during IT shows.

M1 has also a balanced mix of residential and corporate customers, each accounting for about half of revenue. Fixed network services accounted for 13.5% of service revenue.

M1 has declared final dividend of 5.9 Singaporean cents, which is lower than its interim dividend of 7.0 cents. Koh says this reflects the poorer performance in 2H16. Dividend payout ratio was 80.7% for 2016, in line with its usual policy.

Looking ahead, M1 would be investing in new technologies and capabilities to build a portfolio of IT solutions for SMEs and enterprise customers.

“These efforts incur expenditure upfront and would have a dilutive impact on EBITDA margin,” says Koh, adding it would take a couple of years before M1 achieves scale in service adoption and the new business makes meaningful contribution to revenue.

M1 has also entered into a strategic partnership with Nokia to roll out a nationwide narrowband Internet-of-Things network by 1H17. The IoT network is designed to deliver enhanced performance for machine-to-machine (M2M) communications.

Applications include smart metering for electricity and water and sensors for Smart Nation initiatives.

Shares of M1 are down 10 Singaporean cents at S$2.07.