An announcement was made yesterday that TPG is the confirmed 4th telco operator in Singapore. It made a winning bid of $105 million for the spectrum on offer and was 3x the preferential reserve price of $35 million.
TPG will be allocated 2 x 10MHz in the 900 MHz and 40 MHz in the 2.3GHz spectrum bands, with the new spectrum rights to commence from April 2017 onwards. TPG has a stronghold base in Australia so I believe funding capex will not be an issue for them.
Such news meant that there was going to be short term volatility in terms of the share price of telcos, which in fact is not at all new to us. I took this chance to add onto my second batch of M1 by accumulating 5,000 shares at a price of $1.97. On top of the existing shares I had, I had a total of 10,000 shares position now.
My friend, Kyith wrote extensively recently on telco operators which you can find here. He’s the expert in this one, so I usually read and consulted his brain and mind.
Why Am I Buying At This Price?
All of us knows how this is going to play out for M1, given the softer outlook now with more competitor. Mobile service revenue is expected to take the hit once TPG competition intensifies but I am not expecting this until at least 2018 earliest. Handset sales has also show some weakness this year as well as the falling ARPU margins.
The goal here is to manage expectations of what we want to get from this and make sure we don’t overpay.
For me, I wanted an establishment track record of 6% yield in times of difficult period and I think I will achieve this with the company.
M1 current enterprise value is at $2.27B at this moment. The company’s 12 month trailing EBITDA is at $328.95m. We divide them to get an EV / EBITDA of 6.9x. For the record, the last time the company hits valuation this low was during the 2009 GFC period when the EV/EBITDA was at 4.5x. The past 10 years (with exception to the GFC period) we have seen EV/EBITDA ranging at around 8.5x.
What this means is that current valuations are cheap and that the share price has fallen more than the fall in their bottomline. Cheap can be cheap for many reasons and given the drastic pessimistic outlook, it appears like it will continue to languish low.
By the same comparison, Starhub valuations are at 8.5x and Singtel at 15x. Alright, they aren’t totally comparable due to the more diverse and resilient nature of their business.
EV/OpFCF for M1, Starhub and Singtel is at 12x, 13x and 17x respectively.
The regional telcos valuation are at a range of 8x and above. Only XL and Indosat of Indonesia and Axiata of Malaysia are cheaper.
If we assume the next 5 years EBITDA for M1 to drop by 20%, that is EBITDA drops to $268m that will bring the EV/EBITDA valuations to 8.5x. That’s about the range they have been trading at in the last 10 years in terms of valuations. In other words, most of all the bad news have rather been priced in at this price.
The management is likely to cut dividend to about 12 cents. That still gives a respectable 6% yield for the next 3 years at least, and then we’d review again what might come up in the meantime.