General Offer Being Undertaken. Maintain HOLD

• Keppel Corp (SGX:BN4) and Singapore Press Holdings (SGX:T39) have announced the formation of Konnectivity Pte Ltd as their vehicle for making a general offer (GO) for M1 at SGD2.06.
• Inclusive of Keppel T&T (SGX:K11)'s stake in M1, the group holds 33.3% of the telco currently. The offer will proceed if the group can increase their stake to over 50%.
• At a 26% premium to our DCF based (WACC 4.1%, LTG 1%) Target Price of SGD1.63 and with the prospects of short-to-medium-term earnings volatility due to increased competition and a warning of a potential change to dividends, the offer appears attractive in our view.
• We await shareholder Axiata’s response with regards to its stake but we note that securing the public float vote could bring the group above 50%.

15 Weeks to GO

• Pending telco regulator Infocomm Media Development Authority’s (IMDA) approval the general offer (GO) could materialize in 15 weeks.
• Part of Konnectivity’s rationale for the offer is to prepare for the increased competition. The group would like to have more effective control going forward and give shareholders "who are not prepared to bear the risks associated with the complex business transformation" the chance to exit.

Dividend at Risk

• The group has warned that part of the transformation and competition risk could include a potential change in the dividends paid by the telco. There was no direct mention made regarding the current 80% minimum payout policy so the statement could refer to earnings risk rather than the policy itself.
• In any case, the message is loud and clear that existing shareholders that want to skirt such risks can tender at the GO.

Environment Risks Remain the Same

With TPG still a dark horse until it launches services in 4Q18, the competitive environment remains uncertain regardless of the potential ownership structure changes at M1. As such, we make no changes to our industry forecasts; including M1.

Swing Factors

Upside

• A benign competitive environment or a hasty retreat by new entrants would be an unexpected surprise.
• Growth in fixed network via fixed broadband and/or enterprise could provide earnings surprises in the medium to long term.
• Any takeover interest by a new entrant or TPG could trigger a sector re-rating.

Downside

• Should TPG resort to handset subsidies to poach subscribers an escalation in incumbents’ own efforts could take place.
• Higher-than-expected capex pressure as a result of competition and/or 5G rollout.
• Risks of a more rapid decline in wireless-voice, SMS and roaming as data adoption gains momentum.

Source: Maybank Kim Eng Research - 27 Sep 2018