M1 Limited (M1) is one of the biggest telecommunication services providers in Singapore, it also engages in international call services and broadband services, retail sales of telecommunication equipment and accessories, customer services and investment holding. The company and its subsidiaries operate in Singapore in one business segment, but there are three components that contribute to the operating revenue:
1) Mobile communication services
2) International call services
3) Fixed services
Related Events and News:
M1 released their 2016 Full Yearly Results at 24 Jan, 2017. See attached report.
18th Mar, ‘3 largest M1 shareholders reviewing their stakes’, check it out here: http://www.straitstimes.com/business/compa...
17th Mar, ‘M1 and listed shareholders call for trading halt’, refer to the news here: http://www.businesstimes.com.sg/stocks/m1-...
17th Mar, ‘M1's chief financial officer resigns’, see the full news at: http://www.businesstimes.com.sg/companies-...
In 2016, M1 had a declining revenue and profit compared to the performance in the last year. M1 maintain a stable balance sheet and improvement has been seen in the amount of cash. However, when compared to its peer companies, M1 held the least favourable cash position and paid the lowest dividend. Given the situation that Singtel earn absolute advantage in both market share and profit margin, and under the pressure of the fourth entrant in telco industry, M1 chose to build a partnership with Starhub in mobile network business. However, after news that three biggest shareholder of M1 plan to sell their share portion and the Chief financial officer (CFO) resigned came out in March 17, share price of M1 surged 8% and ended up with a trading halt because of the possible ‘mysterious buyer’.
1. Operating performance:
a) Yearly comparison: M1 maintained stable amount of revenue during the recent five years, but when compared to the performance in 2015, the group observed 8.3% decline in revenue, 16.1% decline in net income and lower profit margin.
b) Quarterly result: M1’s 4Q revenue experienced 27% drop, which is due to higher customer acquisition cost, and this result also reflects customer’s disappointment in traditional telecommunication services.
c) Operating components: M1 had a shrinkage of $27.7m in their mobile telecommunications services, which is their main business that occupied 57.7% of the total revenue, but they earned more from the fixed services. From the chart, it is not difficult to find that the proportion of fixed services has overtaken the international call services and become the second largest source of revenue.
2. Financial and cash flow position:
Compared to the performance in 2015, M1 had larger amount of assets, with a 5.6% increase to $1,146.6 million in 2016, driven by rising amount of Property, plant and equipment (PP&E). The group had less inventories, less receivables and less borrowings, thus gained better position by improving its liquidity and solvency. M1 had both higher amount of operating cash flow and free cash flow at the end of the 2016 financial year. The amount of net cash generated from operating increase 40%, but increase in free cash flow is only 10%, which is due to $64m investing outflow on purchase of spectrum rights.
3. Stock information
In the financial year of 2016, M1 payout 95.057% of their net earnings to their shareholders as dividend. Dividend per share (DPS) is 12.9 cents and Earning per share (EPS) for M1 stock is 16.10 cents. The P/E ratio of 13.665, which is higher than the telecommunication industrial ration of 8.734. The change of dividend policy in recent year will be compared with its peer companies in the following part. M1 has a slight lower P/E ratio than that of Singtel and Starhub, which means stock price of M1 is still comparatively undervalued.
4. Peer companies comparison
As the smallest operator among three telecommunication companies in Singapore, M1 should compare their performance with the rest two to understand their position in the industry.
a) Profit Margin
Obviously, Singtel maintained its absolute advantage with highest profit margin among the three local telecommunication companies in the recent five years. M1, with the trend of beating Starhub in 2014, however, had a similar profit margin with Starhub in 2016.
b) Dividend policy
From the two charts above, it’s not hard to tell that, generally Starhub is the company in telecommunication industry that has the highest payout ratio and highest dividend per share, and the payout ratio in 2016 is more than 100%. Though Singtel has the lower payout ratio than M1, it paid greater dividend per share than M1 (except in 2014). To draw a conclusion, M1 has the most fluctuated dividend policy and it basically paid the lowest dividend per share among the 3 telco companies except in 2014.
c) Free cash flow
Singtel has been the company with the largest amount of cash flow in the telco industry during the recent 5 years, which is reasonable regarding the company scale and operating profitability. Comparatively, M1 has the least favourable cash position as its cash flow is always a small positive number and the amount is the lowest among the three companies.
M1’s Mobile Network Business:
Given that 57.7% of the total revenue is from the mobile communication services, M1 kept putting their efforts into acquiring local market share by improving their network business.
‘M1 gives 3G users with big data plans free upgrade to 4G’, refer to this article here: http://www.straitstimes.com/singapore/m1-g...
‘5G well on its way towards reality in Singapore’, check the detail of the news here: http://www.straitstimes.com/tech/5g-well-o...
Discussion in our community:
The hottest discussed issue about M1 is the strategic review and whether there will be the potential buyer of its stock.
Some discussion can be found in the post of @MasterLeong : https://www.investingnote.com/posts/52680 and the post of @andrewko: https://www.investingnote.com/posts/35250
Research report links:
Credit Suisse: https://www.investingnote.com/posts/52754
M1 has witnessed less satisfying performance in the financial year of 2016. When compared to competitors, M1, as the smallest telecommunication service provider in Singapore, has to admitted its weakness and competitive disadvantages. The CFO resigned may indicates some strategic change within the firm, and the priority of M1 is to expand its local user base on telecommunication services. The appearance of new buyer may bring M1 additional room for edge up, but on the contrary, absence of deal may lead a sharp drop for its stock price. In the long run, M1 must focus on updating technology and improving its exist services. For now, M1 is still the weakest one among the three telcos.