M1 Ltd - Stay cautious pending further clarity
- Strategic review by major shareholders.
- No change to fundamentals.
- Not ruling out potential takeover.
No assurance any transaction will materialize
- After last Friday’s news that M1 Ltd’s (M1) three substantial shareholders, Keppel Telecommunications & Transportation (KPTT), Axiata Group (Axiata) and Singapore Press Holdings (SPH), are conducting a strategic review of their respective 19.2%, 28.5% and 13.4% stakes, M1’s share price has since risen 6.9% to close at S$2.17 yesterday.
- M1 also announced the same evening that there is no assurance any transaction will materialize from such review.
- Looking ahead, we expect M1’s earnings to decline amid challenging operating environment with the entry of the 4th telco.
- If no transaction materializes out of this strategic review, we expect M1’s share price to decline towards S$1.75, a value we derived based on its fundamentals and business outlook.
Factoring in potential sale of stakes
- All said, we are not ruling out the potential sale of the three substantial shareholders’ combined stake of 61% after the strategic review, which under SGX rules, will trigger a general offer for the remaining shares of M1 assuming a takeover offer. Based on this, we believe M1’s valuation could be in the range of S$2.27-S$2.62 per share, based on EV/EBITDA multiple of 8-9x, applied to the average of M1’s FY17 and FY18 EBITDA.
- We derived the 8-9x target peg based on two different methods.
- First, M1’s regional peers’ 5-year average EV/EBITDA is 7.4x, and +1SD is 8.1x, which is the basis for our 8x target peg.
- Secondly, our 9x target peg was based on M1’s 5-year average EV/EBITDA of 8.9x. However, this valuation was based on the premise where M1 operates in a three-player market in the past, which may not be the case going forward depending on who the potential buyer is.
Upgrade to HOLD with S$1.96 FV
- Without further clarity and not ruling out a potential takeover scenario, we incorporate a 30% probability of a takeover based on average of 8-9x EV/EBITDA [i.e. (S$2.27+S$2.62) / 2=S$2.45], and a 70% probability that no transaction materializes (i.e. S$1.75).
- Consequently, we upgrade M1 to HOLD with a higher FV of S$1.96 (prev: S$1.75).