Daiwa: Merits of M1’s proposed acquisition of AsiaPac Distribution are ‘mixed’

M1 retail outlet at Orchard Road In SingaporeM1 retail outlet at Orchard Road In Singapore

The merits of M1’s proposed acquisition of AsiaPac Distribution are “mixed,” Daiwa said, adding that the deal wasn’t large enough to move the needle on the telecom’s reliance on its core mobile business.

Last week, M1 said its wholly owned subsidiary M1 Net entered a deal to acquire all of AsiaPac Distribution, a provider of information technology devices and services to enterprise and public-sector customers in Singapore, for up to S$20.0 million.

A quick review of AsiaPac Distribution’s financials paint a mixed picture of the deal, Daiwa said in a note on Monday, noting that it has low profit margins, with its EBITDA margin at 3-8 percent, consistent with its business model, which relies on hardware sales rather than recurring services. EBITDA stands for earnings before interest, taxes, depreciation and amortization.

The price tag for the deal also “appears to be rich” at a price-to-earnings ratio of 20 times, it said. But it added, “upon a closer look, we think M1 is paying a fair price.”

It noted that AsiaPac Distribution’s investment property appears undervalued, its fiscal 2017 free cash flow multiple of five times appears reasonable and S$12 million of the payment consideration is deferred. “M1 also has a good track record of integrating such similar-sized ICT acquisitions,” it said.

But Daiwa noted that the deal won’t move M1’s needle much.

“While this acquisition could help M1 better penetrate the enterprise market, we believe it is too small to drive any meaningful shift away from its core cellular business, which continues to be under pressure due to competition,” it said.

Daiwa estimated that AsiaPac Distribution’s share of M1’s EBITDA would be only 1.3-1.5 percent in 2019-20.

With the core mobile business facing strong competition and with the adoption of new accounting standards, Daiwa cut its 2018-20 earnings per share forecasts by 2-8 percent. It also cut its target price to S$1.55 from S$1.86.

It kept a Hold call.

Shares of M1 ended Tuesday down 1.26 percent at S$1.57.

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