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M1 - UOB Kay Hian 2016-01-28: Focus On Fundamental Valuation

M1 - UOB Kay Hian 2016-01-28: Focus On Fundamental Valuation M1 LIMITED B2F.SI 

M1 (M1 SP) - Focus On Fundamental Valuation 

  • We see the potential sale of Keppel T&T’s 19.2% stake in M1 as vindication that a fourth mobile operator is not forthcoming. 
  • M1’s share price has corrected 16.2% ytd triggered mainly by a misunderstanding over its dividend policy. The stock is oversold and under-valued. 
  • Dividend yield is very attractive at 6.5% for 2016. 
  • Reiterate BUY. Target price: S$3.34. 


WHAT’S NEW 


 Keppel selling M1? 

  • Bloomberg reported that Temasek Holdings is in discussions with Keppel Corporation and Sembcorp Industries on the divestment of non-core assets to shore up their balance sheets. The article cited that Keppel is weighing the possibility of selling its 19.1% stake in M1 held by subsidiary Keppel Telecommunications & Transport (Keppel T&T) without identifying its source. 
  • We contacted M1 and were told that the company was not aware of Keppel’s intention to sell its stake in M1. We believe Temasek and Keppel are exploring various options. We do not think a final decision has been made as yet. 

 Susceptible to takeover due to fragmented shareholding. 

  • M1’s largest shareholder is Axiata Group, who owns a 28.4% stake, just a whisker away from the threshold of 30% that triggers a general offer. Government-linked Keppel T&T and Singapore Press Holdings (SPH) hold substantial stakes of 19.2% and 13.3% respectively. Keppel T&T and SPH are potential sellers as their respective core businesses are ship repair & shipbuilding and media, which are unrelated to telecommunications. 
  • We foresee two possible scenarios that could trigger a general offer for M1: 
    1. Axiata Group acquires more M1 shares from either Keppel T&T or SPH, thus triggering a general offer. Axiata Group is able to finance the acquisition due to a strong cash balance of RM4.4b as of Sep 15, which serves as a war chest. In addition, 66.5%- owned subsidiary XL Axiata plans to sell 2,000-2,500 towers through an open tender to raise up to US$500m. XL Axiata is likely to utilise the proceeds from sale to repay a loan of US$500m from Axiata Group, further boosting Axiata Group’s cash holdings. 
    2. Another foreign telco or a government-linked company (GLC) could acquire the two blocks of M1 shares from Keppel T&T and SPH, thus creating a tussle for control of M1. The two blocks of M1 shares represent a combined 33.4% stake. 

 A vindication for M1. 

  • Potential buyers of Keppel T&T’s stake in M1 are likely to be trade buyers. In our opinion, they include Axiata Group, SPH, government-linked companies (GLC) or other foreign telcos. 
  • Potential buyers need to exercise due diligence on whether Singapore would have a 4th mobile operator. They need assurance that the competitive landscape would not change and the current cosy oligopoly industry structure would be preserved. If a buyer were to be found, it would be a vindication that a 4th mobile player is not forthcoming and there should justifiably be a rebound in M1’s share price. 


STOCK IMPACT 


 Under-valued and oversold. 

  • We view the recent correction of M1’s shares as rather irrational. M1’s 4Q15 results were above expectations and we do not see any change in its dividend policy. 
  • M1’s 2016F dividend yield has further improved to 6.5%. 

 Misunderstanding on M1’s dividend policy. 

  • Some investors were negatively surprised when M1 declared a final dividend of 8.3 cents/share for 2015. This was announced on 18 January when market sentiment was thoroughly depressed. Together with an interim dividend of 7 S cents/share, dividend payout ratio was 80.3% for 2015. 
  • The misunderstanding arose because M1’s final dividend for 2014 was unusually large at 11.9 cents, bringing its total dividend to 18.9 cents and payout ratio to 99.7% for 2014. We had speculated that M1 was trying to shore up confidence ahead of the potential entry of a fourth mobile operator. We did not expect M1 to maintain its dividend payout ratio at 100% for 2015 and, thus, we were not negatively surprised. 
  • M1 intends to maintain its dividend policy of paying out at least 80% of net profit and will regularly review its capital structure. Its dividend policy has not changed. 


EARNINGS REVISION/RISK 

  • We maintain our existing earnings forecast. 


VALUATION/RECOMMENDATION 


 Under-valued and oversold. 

  • Our target price is S$3.69 for Scenario A (no new entrant), which represents an upside of 61.8%. 
  • Our target price would be S$2.27 for Scenario B (fourth mobile operator disrupts the status quo), which is close to current M1’s share price. 
  • Thus, M1’s current share price has already factored in the potential damage from the entry of a fourth mobile operator. 

 We attribute a probability of 75% for Scenario A and 25% for Scenario B. 

  • Thus, our probability-weighted target price for M1 is S$3.34. 
  • Our valuations are based on DCF (COE: 6.8% for Scenario A and 7.8% for Scenario B, terminal growth: 1.0%). 


SHARE PRICE CATALYST 

  • M1 provides attractive dividend yield of 6.5%. 
  • Investors flocking back to M1 in the event that Singapore does not have a fourth mobile operator.



Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-01-28
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 3.34 Same 3.34


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