M1's Shareholder Strategic Review - DBS Research 2017-03-20: Takeover could be in the works

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M1 LIMITED B2F.SI SINGAPORE PRESS HLDGS LTD T39.SI KEPPEL CORPORATION BN4.SI KEPPEL TELE & TRAN K11.SI

M1's Shareholder Strategic Review - Takeover could be in the works 

• Key shareholders conducting strategic review of respective shareholdings in M1. 
• Will support near term interest in M1.
• Shareholder Keppel T&T has highest leverage to any change in M1’s valuation.

M1 shareholders conducting strategic review 

Announcement comes in the wake of heightened trading activity in stocks. 

• M1 Limited (M1), Singapore Press Holdings Limited (SPH) and Keppel Telecommunications & Transportation Ltd (Keppel T&T) made announcements on Friday, 17 March 2017, and referred to an article published by Bloomberg, confirming that M1’s shareholders, Keppel T&T, Axiata Group Bhd and SPH are currently in the midst of conducting a strategic review of their respective shareholdings, which may or may not result in a transaction.
• The three major shareholders – who respectively own 19%, 29% and 13% stakes in M1 for a combined 61% stake – have appointed Morgan Stanley Asia as their financial adviser to assist in the strategic review. 
• This seems to be in line with Keppel Corp’s ongoing efforts to divest non-core assets amid a prolonged downturn in its core rig building business, though it remains to be seen whether the other shareholders are involved as buyers or sellers. 
• There was an increase in trading activity of M1 and Keppel T&T, and the shares gained close to 8% and 5% on Friday respectively, following which they were queried by the SGX, leading to the above announcements.

Who would be a new investor in M1? 

• If the strategic review implies divestment by existing shareholders, at this point, we would only be speculating about the identity of the buyer unless it is one of the existing shareholders – e.g. Axiata bumping up its stake while others exit. 
• It does not seem very straightforward as to why one would invest in M1 (likely with a decent control premium) at this point of time, when a fourth telco operator is slated to enter the market over the next 18 months. This is likely to lead to more competition in the Singapore telco market, resulting in lower market shares for incumbents and lower mobile market revenue overall in coming years, unless the current valuation for M1 looks really cheap. 
• We had earlier highlighted the possibility of new entrant – TPG Telecom Ltd (TPG) – considering making small acquisitions in Singapore’s retail broadband space to acquire customers, but would they consider acquiring a bigger competitor instead of investing in spectrum and telco infrastructure? 

Implications for M1’s share price. 

• M1’s share price has been trading in the range of S$1.92 to S$2.18 (excluding last Friday’s price movements) in the last few months in the lead up to the entry of a fourth telco in Singapore. M1’s last closing price on Thursday (before the news broke) was S$2.03, not far from our fundamental TP of S$1.97. 
• Based on data of previous buyouts and privatisations for SGX-listed companies, we believe the takeover premium could range anywhere between 10-35% over last close, which implies the transaction price, if any, could roughly range between S$2.23 to S$2.74 per share. 
• Given M1’s current market cap of around S$2bn, any third party acquirer would thus require around S$1.3-1.6bn to take over the 61% stake held by the three existing major shareholders. 
• Of course, such a move will also lead to a General Offer (GO) for minority shareholders. But, if the potential acquirer intends to keep M1 listed (given the capex intensive nature of the business), it may not be incentivised to offer a premium price to minority shareholders during a GO.

Implications for shareholder groups. 

• Given that the stake in M1 is not a big proportion of the major shareholders’ market cap, the disposal of M1 stake may not have a major impact on their valuations, as shown in the table below. 
• Keppel T&T’s share price should see the biggest impact in percentage terms from any premium paid for its stake in M1. 
• We have included Keppel Corp in the table as an indirect shareholder, as it is the parent company of Keppel T&T.

Keppel T&T will see biggest uplift

Value unlocking divestment. 

• Keppel T&T’s move to divest M1 could unlock value and free up capital for reinvestment into its core Data Centre business. Among the three major shareholders, Keppel T&T will see biggest impact as M1 investment accounts for 38% of its market value. 
• We estimate that every 10% upside to M1’s share price could lift Keppel T&T’s value (last close of S$1.71/share) by 3.8% or 6.5 Scts per share.

Could the move herald privatisation by parent Keppel Corp? 

• Market speculation of Keppel Corp privatising its 80%-owned Keppel T&T could be rife following this M1 news. 
• Does it make sense? The remaining 20% minority interest in Keppel T&T is worth approx. S$190m based on last closing of S$1.71/share. Assuming the successful divestment of M1 stake, it could free up S$360-480m cash depending on offer price, more than sufficient to fund the privatisation. It fits into Keppel Corp’s strategy to keep the main subsidiaries privately-owned for ease of management and resource allocation.

Big miss on 4Q16 earnings; is worst over? 

• Prior to M1’s news, Keppel T&T’s share price had fallen by c.8% since it released disappointing 4Q16 results at the end of Jan 2017. 
• The big miss on 4Q16 earnings was attributable to the absence of Dec’s rental income from Keppel DC SG 3 that was divested to Keppel DC REIT; startup costs at its Tianjin distribution centre and Alpha DC Fund; higher marketing cost ahead of opening of its Lu’An logistic facility; and share of fair value loss on investment properties at Keppel DC REIT. 
• Moving ahead, sequential improvement is expected in the absence of the one-off items and pick up in occupancy rate.

We estimate Keppel T&T’s fair value to be around S$1.80- 2.23. 

• We attempt to derive a fair value of Keppel T&T based on sum of parts (SOTP) method given more than half of its value lies in its investment in two Singapore-listed companies – M1 and Keppel DC REIT. This gives us a fair value of S$2.00: 
  1. Logistic segment is valued at 12x FY17 P/E, 
  2. Data Centre at 30x FY17 PE, and 
  3. market values/estimated fair values are used for listed subsidiaries. 
  This translates to 1.45x FY17 P/BV and 18.5x FY17 PE, based on Bloomberg consensus estimates.
• We could have applied a 10% holding company discount to the value, arriving at a fair value of S$1.80, if M1 remains on Keppel T&T’s book. Without M1, strictly speaking, Keppel T&T could be seen as a rather pure Data Center player, a segment which contributes 80-90% to its fair value.
• Assuming no holding company discount, and up to 35% takeover premium over M1’s previous close of S$2.03 is offered, fair value of Keppel T&T could range from S$2.00 to S$2.23.

Sachin MITTAL DBS Vickers | Suvro SARKAR DBS Vickers | Pei Hwa HO DBS Vickers | http://www.dbsvickers.com/ 2017-03-20

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