M1, in which Axiata owns a 28.7% stake, has received a cash offer from Keppel and SPH to buy out the company at SGD2.06/share, valuing the mobile operator at SGD1.9b. Axiata appeared less sanguine on the offer and we do not discount the offeror could raise the offer price to get the former’s support. Maintain MARKET PERFORM call on Axiata with an unchanged SoP-driven target price at RM4.80.

Keppel, SPH seeking majority control of M1. Keppel Corp Ltd (KCL), in collaboration with Singapore Press Holdings (SPH), is seeking a majority stake in M1 (the smallest Singapore listed mobile network provider), in a deal worth up to SGD1.28b. KCL currently has 19.33% stake through Keppel T&T while SPH owned 13.45% stake in M1. Both companies and their related parties have deemed interest of 33.27% in M1, which has a market capitalization of SGD1.51b. The offer price will be SGD2.06 per M1 share in cash, representing a premium of 26% to the stock’s last trading price. Both companies said they will make a pre-conditional voluntary general offer for M1 through a separate unit – Konnectivity, which is majority held by KCL but will not be extended to Keppel T&T as it is a related corporation. The offer has to be approved by the Info-communications Media Development Authority and will become unconditional when the offerer and its concerted parties obtain more than 50% stake.

Likely to reject Keppel-led offer. Axiata has issued a press statement in response to the above pre-conditional offer. The group believes the offer should reflect the accurate future value of M1 (inclusive of an acceptable control premium), consistent with market standards. Axiata will continue to evaluate all options available for its stake in M1 to protect and enhance shareholders’ value of both Axiata and M1.

Third largest telco player in Singapore. M1 was founded in 1992 and provides both mobile and fixed services in Singapore. The group has a customer base of 2.16m (62% in postpaid) as of end-1H18, implying 23.6% subscriber market share. Competition is expected to escalate in Singapore, following Australia’s TPG Telecom’s plan to launch services after winning a license to become the fourth telecom operator in the city-state.

M1’s contribution to Axiata has been relatively stagnant in the recent years due to stiff competition. Its turnover improved marginally by 1% YoY to SGD507m in 1H18 with PAT of SGD71m (+0.7% YoY), underpinned by a stable EBITDA margin of 30.2% (1H17: 30.7%). The group contributed to Axiata’s profit of RM60m in 1H18, similar to a year ago.

Maintain MARKET PERFORM with an unchanged SoP-driven TP of RM4.80. The offer price of SGD2.06 is merely 6.2% higher as compared to Axiata’s M1 book value per share of SGD1.94 (as of end 2Q18). Thus, it is not a surprise Axiata appears less sanguine to the current offer. Based on the past five-year M&A deals in Singapore’s telecommunication sector, the median of the targeted company’s EBITDA multiplies stood at c.8.8x, thus suggested that Axiata’s M1 stake could be potentially worth up to SGD2.88/share. We also do not discount that Keppel-SPH could potentially raise the offer price to get Axiata’s support. All in, we made no changes to our FY18-19E earnings forecasts. The group’s outlook is expected to remain challenging in view of the unfavourable currency volatility, and higher gestation period in its digital investments. Key downside risks include: (i) keener competition, (ii) tax and regulatory challenges, and (iii) currency volatility; Upside risks are: (i) stronger-than-expected recovery at Celcom and XL, and (ii) edotco’s organic and inorganic growth.

Source: Kenanga Research - 28 Sept 2018