M1 – CIMB
Battle for M1? We think not
Shareholding tussles unlikely
Maintain Outperform. The battle for control over Singapore-listed Parkway has led us to question if M1 could equally be a takeover target, given its fragmented shareholdings. However, we believe the probability of this happening is very slim as: 1) M1 operates in a small and mature market which is unlikely to attract substantial takeover interest, unlike Parkway; and 2) no new major shareholder has emerged in M1’s case. We maintain our OUTPERFORM rating with an unchanged DCF-based (8.5% WACC) target price of S$2.20. M1 remains our top Singapore telco pick, given its potential for capital management backed by a strengthening balance sheet, benefits from NGNBN and the positive impact of soaring tourist arrivals on its inbound roaming services.
The battle for control at Parkway Holdings between Khazanah and Fortis has prompted us to sift through our coverage in search of telcos with fragmented shareholding structures. M1 comes to mind with its key shareholders being 29.62% Axiata (though Sunshare), 19.96% Keppel Telecoms, and 13.89% Singapore Press Holdings. SPH’s stake in M1 is seen as a non-core investment as its bread-and-butter is print media and property. The combination of M1’s fragmented shareholdings and SPH’s treatment of its stake in M1 could lead to speculation that Axiata could mount a full takeover of M1.
Low likelihood. We believe the probability of a battle for control or takeover of M1 by Axiata is very slim:
• Firstly, M1 operates only in Singapore, a small market and mature market, and is unlikely to attract the interest of Axiata or new strategic investors with interest in substantially larger emerging market assets. On the other hand, Parkway is seen as a growth company with a network of 16 hospitals in Asia, including Singapore, Malaysia, Brunei, India and China.
• Secondly, a new major shareholder has not emerged, unlike the case of Parkway. Should Axiata decide to buy out the other major shareholders in M1, it would breach the 30% trigger for a general offer. Assuming it acquires M1 at a 20% premium to M1’s share price, and fund 60% of this with debt, Axiata would have to cough up RM1.5bn, which should be easily funded by its balance sheet. We project its FY10 net debt/EBITDA at 1.1x, up from our base projection of 0.8x. However, the market is likely to frown at such a transaction as M1 is a slow-growth telco operating in a small market, and the funds should be returned as dividends.
Valuation and recommendation
Maintain OUTPERFORM on M1, with an unchanged DCF-based target price of S$2.20. M1 remains our top Singapore telco pick, given its potential for capital management backed by a strengthening balance sheet.