Would an M1 deal be a play on Singapore telco consolidation?

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

While details remain fuzzy over what transaction is being weighed for M1, a potential investor in Singapore’s current smallest telco could be looking to play on expectations the Singapore market could consolidate back down to three players longer term, UOB KayHian said in a note on Tuesday.

UOB KayHian upgraded M1 to Buy, with a S$1.88 target price, saying interest from a potential acquirer would boost the stock.

Keppel Corp. said on Monday that it was “concurrently” considering deals involving its stakes in Singapore telco M1 and Keppel Telecommunications & Transportation, both of which could lead to transactions in the shares. Keppel T&T, which is 79 percent owned by Keppel, owns a 19.2 percent of M1.

Singapore Press Holdings said on Monday that it was approached by Keppel to participate in a possible transaction involving its 13.45 percent stake in M1, which is held via wholly owned subsidiary SPH Multimedia.

While both Keppel and SPH cautioned there’s no guarantee of a deal, if both companies sell their shares to an investor, it would trigger a general offer, UOB KayHian noted.

“We believe the potential acquirer could be a private equity firm or foreign telco. The potential buyer could be attracted by the possible consolidation of the mobile industry from four to three players over the longer term,” the note said.

A potential acquirer could sell out during the consolidation as well as benefit from price stability after the consolidation, it said.

Looking further ahead, UOB KayHian said it expected StarHub could acquire either M1 or TPG Singapore, once it lauches its services as the city-state’s fourth telecom, probably starting from the fourth quarter of this year. But it also noted that M1 and TPG Singapore could consider combining at some point.

The other M1 shareholder

Malaysia-listed Axiata, which holds around 28.7 percent of M1, hasn’t commented.

But in a note on Monday, Nomura pointed to the previous review of M1 holdings by Axiata, Keppel and SPH , which concluded in July 2017 without a deal.

“For Axiata, there is less pressure vs last year to monetise its M1 stake, as gearing levels are more manageable now,” Nomura said.

It also noted that M1’s contribution to Axiata earnings was “steady and substantial,” at more than 100 million Malaysian ringgit a year, or 13 percent of the group earnings in 2017. But at the same time, Axiata has M1’s book value at around S$2 a share, compared with the stock price at S$1.63 at Friday’s close.

In a separate research note, Nomura said that Keppel could get a near-term positive from any M1 stake sale.

“A divestment (if it happens) could boost near-term earnings and cash flows even as its recurring earnings ramp-up remains slow,” Nomura said.

Nomura noted that Keppel T&T posted an exceptional gain of S$191 million in 2002 when it cut its M1 stake to 14.2 percent from 35 percent, with the stock now at a premium to the 2002 IPO price of S$1.32 a share.

Nomura kept Keppel at Reduce with S$5.90 target, pointing to property cycle risks, potential pressure on property divestment gains in 2019 and the slow recovery in the offshore and marine sector.

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