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Morningstar | M1’s Slightly Lower-Than Expected 3Q Largely Irrelevant; Likely to Be Taken Private at SGD 2.06

From shareholders’ perspective, M1’s slightly below expectations third-quarter result is less relevant than usual given it is likely to be taken private at SGD 2.06 per share as per the announcement on Sept. 27. Nevertheless, the company reported third-quarter services revenue up 2% with EBITDA down 3.6% and net profit down 5.5%.  In our view, M1 will be the most exposed Singapore operator to TPG entering the mobile market later this year or early next year given it has fewer bundled customers than its rivals, StarHub and SingTel, and around three fourths of its service revenue is from mobile services. From this perspective, the preconditional 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 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. A firm offer will not be made until regulatory approval is received with estimated timing at the end of November. Therefore, there is no need for any immediate actions for existing M1 shareholders. Our narrow moat rating is retained.

With an 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 given the existing two shareholders already own 33% of the shares and could block any potential rival offer, and our fair value for 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 (or TPG) but we would not expect regulatory approval for such a bid at this stage.

Mobile service revenue, which is 75% of total service revenue was flat in the third quarter after growing 3.2% in the first half. 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 second quarter 2018 at 23%. The strong performance of M1’s mobile virtual network operator, or MVNO, called Circles.Life has helped in M1’s market share recovery but M1 is not able to provide details on its contribution due to non-disclosure clauses in its contract. Over the past four years, M1’s fixed line broadband market share has also 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 will likely pressure pricing in 2019 and 2020. M1’s international call revenue was down 29%, an acceleration in the decline seen in recent quarters, while fixed services revenue was up 26%.