• 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).

Source: OCBC Research - 21 Mar 2017