M1 Ltd - OCBC Investment 2017-03-21: Stay cautious pending further clarity

M1 Ltd - OCBC Investment 2017-03-21: Stay cautious pending further clarity M1 LIMITED B2F.SI

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).

Eugene Chua OCBC Investment | http://www.ocbcresearch.com/ 2017-03-21
OCBC Investment SGX Stock Analyst Report HOLD Upgrade SELL 1.96 Up 1.750