M1 - OCBC Investment 2016-12-09: Lower FV On Higher Interest Rate Environment

M1 - OCBC Investment 2016-12-09: Lower FV On Higher Interest Rate Environment M1 LIMITED B2F.SI

M1 - Lower FV On Higher Interest Rate Environment

  • Share price fell on rising treasury yields.
  • Most impacted by 4th Telco.
  • Yield spread trading above 5-year mean.

Volatile sovereign bond yields 

  • Over the past month since Donald Trump was elected as the next U.S. president on 8 Nov, we have seen increased volatility in the sovereign bond yields. 
  • Initially, the market believed that a Trump victory would spark uncertainties and result in stronger demand for safe-haven assets and yield plays. However, just a few days after the presidential election, bond prices tumbled and yields spiked, largely due to concerns that inflationary pressures may be more intense than previous expectations. 
  • As Trump shared more on his expansionary fiscal policy plans and on recent strong economic data points, the implied probability of a rate hike in Dec has also increased to 100%, from 80% a month ago. 
  • Correspondingly, we saw that the Singapore government bond yields, SOR and SGD interest rate swaps have all risen as well. As a result, “yield-play” counters including M1 Ltd (M1) saw a sharp fall in its share prices. Similar to the share prices of other telcos in Singapore, we believe IMDA’s announcement on the 4th Telco entry on 16 Nov exacerbated the pullback in M1’s share price.

4th Telco impact already priced-in 

  • In our view, we believe the market has already fairly priced-in the 4th Telco impact on M1. With Singapore Government 10-year bond yield and M1’s forward dividend yield currently trading at 0.6SD and 1.2SD above their 5-year mean, respectively, we note that the yield is trading at 0.7SD above its 5-year mean. 
  • We had previously highlighted that M1, given its significant exposure to Singapore’s mobile market, will be the most impacted among the three telcos in Singapore.

Updating risk-free rate assumption to 2.6% 

  • While we keep our forecasts largely unchanged, we update our risk-free rate assumption from 2.0% to 2.6% on higher interest-rate environment ahead. Consequently, our FV lowers from S$2.25 to S$2.08. 
  • Maintain HOLD, supported by a 7.4% forward dividend yield.

Eugene Chua OCBC Investment | http://www.ocbcresearch.com/ 2016-12-09
OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 2.08 Down 2.250