M1 Ltd - Looking For a New Hub
- M1’s shareholders, including Axiata Group (AXIATA MK, NEUTRAL, TP: MYR4.30), are reviewing their stakes in the telco which could potentially lead to an exit or selldown.
- We think this may be a prelude to an eventual merger (with StarHub) which would significantly bolster the telcos’ ability to compete with TPG in the longer term.
- An in-country consolidation is also viewed positively to reduce the competitive intensity and drive shareholder value-accretion in the longer term via revenue/opex/capex synergies.
- NEUTRAL, with a SGD2.05 DCF-based TP(6% downside).
Strategic review by shareholders.
- M1’s shareholders – Axiata Group, Keppel Telecommunications and Singapore Press Holdings – announced that a strategic review is being undertaken with respect to their respective shareholdings (28.5%/19.2%/13.4%) in the company which may or may not lead to a transaction.
- The three shareholders, holding a collective 61.1% stake, have jointly appointed Morgan Stanley Asia (Singapore) as their financial advisor to assist in the strategic review.
- There is no assurance that any transaction will materialise from the strategic review, or that any binding agreement will be reached.
- We gather from our industry sources that the review involves the potential rationalisation of their shareholdings in M1 that could lead to a complete exit or sell-down. This was triggered by concerns over the competitive landscape arising from a new mobile entrant.
Merger with StarHub?
- We do not rule out a potential M1-StarHub merger – a move that would allow both telcos to pit their respective strengths to fend off the threat from a fourth mobile entrant (TPG).
- We think a merger makes sense as M1 is viewed as the weakest of the three telcos in Singapore given its dominant mobile exposure ( > 60% of revenue) and a merger could address commercial challenges; there are revenue synergies (better cross-selling/bundling opportunities for M1 which does not offer a quad-play service) and cost synergies (network, sales & distribution, capex etc); both telcos are in talks for potential network sharing; and the shareholders of both entities can consolidate their stakes in a bigger and more formidable outfit that would be in a better position to compete with Singtel and TPG Telecom (TPG).
- There are merits to the merger, in our view, as StarHub (STH SP, NEUTRAL, TP: SGD2.70) and M1 are also focusing on the enterprise and fixed network segments to drive growth and to mitigate the pressure from their traditional mobile segments.
- An in-country consolidation would reduce the intensity of competition, mitigate the duplication of resources and ensure the commercial viability of telcos.
Maintain NEUTRAL with a DCF-based TP of SGD2.05 (WACC: 8.5%, TG: 1.5%).
- We maintain our forecasts, which assume a FY17F-19F core earnings CAGR of -16% due to competition from TPG, which is slated to unveil its mobile service by 2018.
- M1’s share price surged 8% last Friday before trading was suspended pending the announcement. We believe potential M&A news flow would be supportive of sentiment on the stock.
- Our preferred exposure to the sector remains Singtel (ST SP, BUY, TP: SGD4.00).