M1 – Kim Eng

Nice way to start the new year

Event

• M1 will report its fullyear FY10 results next Wednesday. While we expect the results to be good but not extraordinary, its share price has risen 12% since early last month on dividend expectations and perhaps, market speculation that it may be the next takeover target, as Axiata owns close to 30% stake. But we do not think the Malaysian mobile operator will want to buy the rest of M1 or to sell its stake. Nevertheless, as our target price has been increased to $2.88 (16% upside) upon rolling over to FY11 forecast, we maintain our BUY call.

Our View

• M1 will report FY10 results next Wednesday after the market closes. We expect revenue to grow 10.5% YoY to $239m and earnings to rise 4% YoY but fall 1.5% QoQ on higher yearend A&P expenses and smartphone subsidies. Also, the final dividend per share of $0.078 is expected to exceed FY09’s $0.072 for a total fullyear DPS of $0.142.

• In the light of recent M&A events, M1 stands out for its significant Malaysian interest. Mobile operator Axiata owns a 29.5% stake, or 265.4m shares, of which 118.5m shares were acquired from former shareholders C&W and PCCW at $2.20 a share and the rest at $1.852.05 between August 2005 and March 2006. Add $0.55 in dividends paid since FY06, Axiata’s average cost could be as low as $1.50.

• However, we think it is unlikely that Axiata would want to take over M1 or to sell its stake. It has been scaling back capex in recent years and has just reduced its net debt/EBITDA to below 1x. Our Axiata analyst also believes buying M1 would eat into its funding for other more important investments. On the flip side, it would be difficult for Axiata to find another investment that can yield more than 10% annually. However, a potential buyer may have to pay as high as $3.54, going by our DCF valuation.

Action & Recommendation

We maintain our BUY call and raise our target price to $2.88 (from $2.63) as we roll over to FY11 valuation target of 15x PER and 5% dividend yield.

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