M1 Ltd - RHB Invest 2017-03-20: Looking For a New Hub

M1 LIMITED B2F.SI

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.

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.

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.

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).

Singapore Research RHB Invest | http://www.rhbinvest.com.sg/ 2017-03-20

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