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Storm clouds darken over M1 as stake sale plans by major shareholders fall through

Michelle Zhu
Michelle Zhu7/19/2017 10:37 AM GMT+08  • 3 min read
Storm clouds darken over M1 as stake sale plans by major shareholders fall through
SINGAPORE (July 19): M1’s share price has shed 14 cents or some 7% to $1.96 this morning.
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SINGAPORE (July 19): M1’s share price has shed 14 cents or some 7% to $1.96 this morning.

The drop follows last night’s announcement that its majority shareholders – Axiata Group, Singapore Press Holdings (SPH) and Keppel Telecommunications & Transportation (Keppel T&T) – have decided not to proceed with their strategic review to dispose of their stakes in the local telco.

See: M1 2Q earnings falls 21% to $32.5 mil; majority shareholders abandon stake sale

While CIMB reiterates its “reduce” call on the stock with an unchanged target price of $1.70, OCBC has downgraded its rating on the stock to “sell” from “hold” with a lower fair value estimate of $1.75 from $1.96 previously on its weak earnings outlook.

Both research houses say the telco’s 2Q17 and 1H17 earnings have met their expectations.

Meanwhile, RHB continues to rate the stock at “neutral”, but has revised its target price down to $1.90 from $20.5 previously after cutting FY17-19F core earnings estimates by 13.4%, 11.7% and 11.9% respectively to factor in a higher subscriber acquisition cost and lower margins going forward.

In a Wednesday report, RHB’s research team says that M1’s 1H17 results fell short of their expectations, while the cancellation of its shareholders’ strategic review have confirmed their earlier view that transaction premiums may have slipped.

It has nonetheless identified the fixed services segment as a “pillar of strength” for the company, having fuelled a 22% y-o-y rise in fixed services sales in 2Q/1HFY17.

Separately, OCBC lead analyst Eugene Chua opines that M1’s share price by far has been largely supported by the potential takeover scenario – and without this support, it should continue trading based on its fundamentals.

“Looking ahead, we expect the competitive landscape to worsen with TPG’s entry and also with MyRepublic’s intent to launch mobile services as a mobile virtual network operator (MVNO) in Singapore,” says Chua.

“We believe M1’s share price could see some weakness today after its three major shareholders announced that they will not proceed to sell their stakes, as the proposals received did not meet the minimum criteria. M1’s share price was at S$1.97 (16 Mar), prior to their announcement on 17 Mar of a strategic review exercise,” adds CIMB analyst Foong Choong Chen.

According to Foong, a good bear-case entry point for M1 would be below $1.38, and its exit point at above $2.01 in a bull-case scenario.

The analyst notes that while M1’s mobile revenue has continued to ease y-o-y in the recent quarter, this comes at a slower pace, and that the company’s revenue from its fixed services segment is still going strong.

“M1’s 13.7x FY17F EV/OpFCF is at a 21% discount to ASEAN telcos, which we think is justified given its future earnings risk,” says Foong.

“Upside/downside risks are better/worse-than-expected impact of TPG’s entry.”

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