Would Peter Lynch Buy M1?

M1What does a golf caddy know about investing? To find the answer, we need to perhaps ask Peter Lynch, who reckons his success in investing is rooted in what he learned from golf.

He once said that if a golfer needs a three-iron to get over the water, but he only hits it well enough to get over one time in four, then it is not a good pick. He went on to say that just as you need to have concrete reasons to pick a club, you have to have concrete reasons to pick a stock.

Lynch’s concrete picking skills catapulted him to legendary investing status. Over a 13 year period starting in 1977, he delivered an annual average return of 29%.

So, what would Peter Lynch make of M1 (SGX: B2F), Singapore’s third-largest telecom provider?

M1 may lag SingTel (SGX: Z74) and StarHub (SGX: CC3) in size, but it is far from small, which is what Peter Lynch likes. Its market value is around S$3 billion. That is still only a quarter of the size of the median market value of the 30 companies that make up the Straits Times Index (SGX: ^STI). On that score, M1 might just make it onto Peter Lynch’s size criteria by the skin of its teeth. But that could be about as good as it gets for M1.

Peter Lynch tries to avoid popular stocks in popular industries. While telecoms may have been the pin-up of the TMT era, that is certainly no longer the case today. The industry has lost much of its allure even though telecoms continue to grow as demand for communication services increases. That said, M1’s growth rate is unlikely to inspire Lynch. Over the last ten years, revenue has grown from about S$750m to just over S$1b – a somewhat pedestrian 3% a year revenue growth rate.

Even though Lynch is primarily a growth investor, he nevertheless pays close attention to dividends. He likes companies with low payout ratios because it could mean that more money is retained for expanding the business. M1’s payout ratio, which has hovered around 70% to 80%, may be considered attractive for income investors but it could deter growth investors such as Lynch.

Lynch is also a stickler for valuation. He doesn’t mind paying up for a share provided the earnings warrant it. Currently, M1 is valued at 20 times earnings. To excite Lynch, profits would need to grow at a fair clip. M1’s valuation is higher than SingTel’s valuation of 16 times historic earnings; more expensive that StarHub’s historic PE of 19 and considerably more pricey than the overall market. Unfortunately earnings have barely grown, which is unlikely to impress Lynch much.

M1 might be a darling amongst income investors. Its 6% dividend yield is one of the highest on the Singapore market. But the high-yielding share is unlikely to get Peter Lynch rushing to hit the “buy” button.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.