SINGAPORE (March 20): M1 on Friday saw its share price surge by 8% before trading was suspended, ahead of an announcement of a strategic review by shareholders Axiata Group, Keppel Telecommunications & Transportation (Keppel T&T), and Singapore Press Holdings (SPH).
Holding a collective 61.1% stake in M1 worth about $1.2 billion, the three shareholders have jointly appointed Morgan Stanley Asia (Singapore) as financial advisor to assist in the strategic review.
They have stressed that there is no assurance that any transaction will materialise from the strategic review, or that any binding agreement will be reached.
(See also: Three biggest shareholders of M1 mulling stake sale)
“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,” says RHB in a Monday report.
RHB is keeping its “neutral” call on M1 with a target price of $2.05.
See also: RHB initiates coverage on CSE Global with ‘buy’ call with TP of 58 cents.
RHB says it “does not rule out” a potential merger with StarHub as the two smaller incumbents could benefit from joining forces to fend off fourth mobile entrant TPG Telecom.
(See also: TPG Telecom wins race to become Singapore’s fourth telco)
The strategic review comes amid expectations that M1 could face the largest earnings impact among the incumbents with the impending entry of TPG.
See also: Suntec REIT biggest beneficiary from MAS’s ‘looser’ leverage, ICR rules: OCBC
“Based on M1’s FY16 results, approximately 90% of its revenue is exposed to the Singapore mobile market, which we define as the sum of mobile service revenue, handset sales and international call services revenue,” says OCBC Investment Research lead analyst Eugene Chua.
On top of the threat from TPG, Chua notes that Mobile Virtual Network Operator (MVNO) Circles.Life recently pushed out an aggressive promotion offering new customers an additional 20GB of mobile data at only $20.
This will “put even greater pressure on the incumbents to respond with similarly attractive data-focused price plans as well,” says Chua.
Chua forecasts that M1’s post-paid average revenue per unit (ARPU) will decline by 16% over the next five years.
“The weaker earnings outlook also translates to lower dividends over the next five years based on 80% payout ratio,” he says.
In a report on Friday before the announcement of the strategic review by M1’s shareholders, Chua had downgraded M1 to “sell” from “hold”, with a lower fair value of $1.75, from $2.03 previously.
Both RHB and OCBC reiterate that their preferred pick for the Singapore telco sector is Singtel.
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RHB has a “buy” recommendation on Singtel with a target price of $4.00.
OCBC’s Chua also has a “buy” call on Singtel, with a fair value estimate of $4.25.
“We remain positive over Singtel’s long-term outlook given its growing presence in the cyber security segment, and exposure to regional mobile associates,” says Chua in a separate sector report on Friday.
OCBC is keeping its “neutral” stance on the telco sector, with Singtel as its only “buy”.
As at 12.25pm, shares of M1 are trading 1 cent higher at $2.20.
Meanwhile, shares of Singtel are trading 1 cent lower at $3.98.
