M1 – Phillip

Proposed acquisition of Qala

M1 announced that it had entered into a sale and purchase agreement to acquire allthe ordinary shares of Qala Singapore Pte Ltd. Qala is an internet service providerand offers internet services to corporate, enterprise and public sector customers in Singapore. The consideration is S$14.9 million and another S$3.0 million will be paid
if certain financial targets were met by Qala.

Boost for M1 in the internet services market. We like the acquisition as it helps to strengthen M1’s position in the internet services market. M1 is the last player to enter the internet services market and has to catch up with SingTel and StarHub in terms of market share. Through the acquisition, M1 gains access to the customer base and business contacts of Qala. This is likely to boost the revenue of M1 from the internet services segment. In fact, internet services (or broadband) revenue is projected to increase from S$2.8 million in FY2009F to S$16.2 million in FY2010F and S$18.3 million in FY2011F.

Maintain Hold with fair value raised from S$1.67 to S$1.78. We maintain our hold recommendation as M1 remains the smallest telecommunications player in the Singapore market and does not have any overseas operations. However, due to the benefits from the acquisition and the likely increase in revenue, we raise the target price from S$1.67 to S$1.78 based on the free cash flow to firm model.