M1 - DBS Research 2017-04-28: “Bids” On The Table

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M1 LIMITED B2F.SI

M1 - “Bids” on the table

• Upgrade to BUY with a higher TP of S$2.54.
• Share price sentiment could be supported by potential sale of stake by M1’s major shareholders, which would trigger a GO.
• First round of bids are reportedly in already.
• Operating performance for 1Q17 in line.

Upgrade to BUY with a higher TP of S$2.54. 

• We upgrade to a BUY call for M1 with a revised target price of S$2.54 (versus S$1.97 previously). 
• In light of the developments following M1’s shareholders’ strategic review announced in March 2017 and the ongoing newsflow involving potential bidders for the company, we believe that there should be continued support for M1’s near-term share price. 
• We highlight the possibility of a partial or block sale of the 61% stake held by M1’s major shareholders. In the event of a block sale, such a move will also lead to a General Offer (GO) for minority shareholders.

Operating performance for 1Q17 in line with expectations. 

• M1’s 1Q17’s operating performance was largely in line with our expectations, as service revenues held up, driven by continued growth in fixed services revenue, offset by expected declines in mobile revenue and international call services revenue. 
• We continue to expect pressures in mobile ARPU going forward owing to the impending entry of the fourth mobile player, TPG.

WHAT’S NEW

• Potential bidders have surfaced, what next?
• We attempt to answer several questions that might be at the back of investors' minds below:

Why would various potential bidders be interested in M1? 

• We segregate potential bidders into four categories below and list possible reasons why they may be interested in M1: 
  • Category 1: Foreign telcos - Foreign telcos with strong cash and balance sheets may be looking to expand beyond the countries they operate in.
    Typically, telco takeover deals may be hard to come by as regulators might attempt to block such deals, citing antitrust concerns, or national interests at stake. Singapore, being a mature telco market with close to 150% penetration rate and good telco infrastructure in place, may appeal to this group of investors.
  • Category 2: Private equity firms - Private Equity firms may have existing stakes in other foreign telco or telco assets and may be interested in taking M1 private, with the possibility of relisting the entire portfolio of telco assets thereafter.
  • Category 3: Companies in adjacent industries - Companies in adjacent industries, for instance, telco equipment manufacturers, may be interested in investing in telcos, expanding their reach along the value chain.
  • Category 4: “Others” - “Other” companies, not belonging to any of the above categories, may be interested in a completely new industry as part of the group’s diversification strategies.

Why a strategic review now? 

• As mentioned in our previous report (See M1’s Shareholder Strategic Review : Takeover could be in the works), the strategic review 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.

Will it be a partial or block sale? 

• It will depend ultimately on the intentions of the potential bidders. We note that since the combined stake of the major shareholders is 61%, In the event of a block sale, such a move will also lead to a General Offer (GO) for minority shareholders. The potential bidder will have to be prepared for a GO scenario.
• We note that back in 2003, Keppel and SPH and other companies had intended to sell their stakes in M1. Keppel’s then-Finance Director, Mr Teo Soon Hoe, mentioned that “it is also best for all old shareholders of M1 to stay as a block and this is what we have reached in terms of an agreement”.

Will Axiata increase its stake? 

• We think not. Although there have been speculations in the past that Axiata might be looking to increase its stake in M1, the former is currently trying to pare down its debts (e.g. recent sale of pre-IPO stake in edotco). 
• Any increased stake on Axiata’s end will trigger a GO which we think is not in line with its focus on South Asia and Indo China countries currently, apart from Malaysia and Indonesia.

At what price do you think a takeover, if any, is likely to happen? 

• To help answer this question, we need to look at the cost of the major shareholders’ respective M1 shares: 
  • Keppel Corp & SPH: Prior to M1’s public listing, Keppel and SPH each held 367,500 shares, which was equivalent to 35% shareholdings. Post-IPO, Keppel and SPH held 157,300 shares, which was equivalent to a 14.16% stake each in M1 when it went for public listing. Then, the IPO price was $1.25/share. Keppel had subsequently increased its stake by slightly over 5% in M1 over the years, notably in 2006 and 2007, when M1 was trading in the range of ~S$2.00- S$2.50/share. Keppel Corp currently owns 19.2% of M1’s shareholdings.
  • Axiata: Telekom Malaysia bought its stake in M1 under its international business arm before the demerger between its fixed-line and mobile business (now renamed as Axiata) in 2005. S$260.8m was reportedly spent on a 12.1% stake of M1 (approximately S$2.17/share) , which was gradually increased thereafter. Subsequently, it was reported that Telekom Malaysia’s shareholding was increased from 18.5% to 23.6% on 25 August 2005, although no price was given. By 1Q2007, Axiata had secured a combined 29.7% shareholding in M1. From 3Q2005 to 1Q2007, M1 was trading at a range of ~S$2.00-2.40/share.
• We note that over the years, M1 has paid out a total of ~$369m, ~$283m, and ~$506m of dividends to Keppel, SPH and Axiata respectively. 
• On a total return basis, we believe that the dividends have more than covered Keppel and SPH’s “cost of investment”, taking S$1.25/share as the cost per share for their initial investment at M1’s IPO. 
• We estimate Axiata’s equity cost of investment to be in the range of S$500-600m, and believe M1 has been a good investment thus far.

Conclusion

• In view of the recent discussions of potential bidders for M1, we believe a transaction is more likely in the near future and peg a ~25% M&A premium to M1’s pre-announcement trading price of S$2.03, while noting that the takeover premium could range from 10-35% over the last close before announcement (based on data of previous buyouts and privatisations for SGX-listed companies), which implies a transaction price range of between S$2.23-2.74 per share.
• Our revised TP of S$2.54 also implies a transaction multiple of 8.4x EV/EBITDA, which we believe is reasonable compared to recent telco takeover transaction multiples, as shown below.

Key Risks to Our View

• Bids may fall through. Should there be no takeover of the company, the price could drop back to ~S$2, the level before the news of shareholders’ strategic review was announced. In that scenario, our TP would revert to S$1.97.

Suvro SARKAR DBS Vickers | Singapore Research Team DBS Vickers | Sachin MITTAL DBS Vickers | http://www.dbsvickers.com/ 2017-04-28

DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 2.54 Up 1.970