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Morningstar | M1's Full-Year Result Largely Irrelevant; Still Likely to Be Taken Private at SGD 2.06 per Share

From shareholders’ perspective, M1’s full-year result is less relevant than usual, given that the company is likely to be taken private at SGD 2.06 per share as per the voluntary conditional offer made Dec. 28, 2018. Nevertheless, the company reported fourth-quarter services revenue down 2% with EBITDA down 10% and net profit down 21%. In our view, M1 will be the most exposed Singapore operator to TPG’s entry into the mobile market, since it has fewer bundled customers than rivals StarHub and SingTel and around three fourths of its service revenue is from mobile services. From this perspective, the voluntary general cash offer to M1 shareholders to take over the company at SGD 2.06 per share looks attractive. We make no changes to our SGD 2.06 fair value estimate based on our expectation that the offer will proceed. Our underlying valuation for the company, which forms our bear-case value, remains at SGD 1.54 per share. We retain our narrow moat rating.

Given M1's uncertain near-term future with a new competitor set to launch mobile services within the next six months, we would expect the offer to be successful. We would not anticipate a competing offer since the existing two shareholders already own 33% of the shares and could block any potential rival offer, and valuation of the company is 25% below the offer price. The only bidder we can think of that could make a realistic competing bid would be an existing operator, but we would not expect regulatory approval for such a bid at this stage. On Jan. 22, the bidding consortium Konnectivity, jointly owned by existing M1 shareholders, Keppel, and Singapore Press Holdings, announced that it did not intend to increase the offer price of SGD 2.06 under any circumstances whatsoever, and therefore under existing Singapore listing rules it would not be allowed to subsequently increase the offer price.

As of that date, it had received offer acceptances for only just over 1% of outstanding shares, in addition to the 33% already owned by the consortium. It extended the closing date for acceptance of the offer to Feb. 18 and needs control (50% plus one share) for the offer to become unconditional, but its aim is to take M1 private so it can spend the money and potentially weather the upcoming competitive storm without quarterly reporting requirements.

Mobile service revenue, which is 75% of total service revenue, was down 2.7% in the fourth quarter but grew 0.9% for the full year. M1’s mobile services revenue share of the market had gradually fallen from 30% in 2003 to 19% in 2016 but stabilized in 2017 and exited the third quarter of 2018 at 23%. The strong performance of M1’s mobile virtual network operator, Circles.Life, has helped in M1’s market share recovery but M1 is not able to provide details on its contribution due to nondisclosure clauses in its contract. Over the past four years, M1’s fixed-line broadband market share has increased from 7% to 15%, which seems to be also helping its performance in the mobile market. However, we believe that TPG will come into the market in an aggressive fashion later this year, which is likely to pressure pricing in 2019 and 2020. M1’s international call revenue was down 18% in the fourth quarter while fixed services revenue was up 8.6%, a slowdown from recent growth rates of over 20%. The company guided to a capital expenditure increase to SGD 140 million from SGD 107 million in 2018, consistent with its plans to increase spending in the business.