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Would Benjamin Graham Buy M1 Ltd?

M1 Ltd (SGX: B2F) became Singapore’s second mobile network operator after SingTel (SGX: Z74) when it was launched in 1997. It is currently the smallest of Singapore’s three telecommunications providers. The other being StarHub (SGX: CC3).

2014 saw increases in M1’s operating revenue and net profits. Perhaps this is one reason that M1’s share price, which is currently at S$3.87, stands close to its all-time high of S$3.93 a share.

Such a statistic might have you prematurely discounting M1 as a value share. However, dig a little deeper and you may find that such an assumption might not be true.

A P/E ratio of 20 is above the market average however, the earnings yield of 5% that this translates into is also more than twice the risk free return currently available through 10-Year US Treasury Bonds. That is one criterion that Benjamin Graham would insist upon. In fact, M1’s share price could rise by 20% to S$4.70 and still meet the requirement.

The market-beating dividend yield of 5.5% is even more encouraging. On this measure, the share price could rise as high as S$10. A note of caution might be needed though, as the full year dividends fell year-on-year by 2 cents a share in 2014.

Whilst M1’s price relative to its earnings and the rewards it offers investors might seem cheap, the same cannot necessarily be said after having a look at the company’s balance sheet.

Net debt of just S$301 million seems more than reasonable for a company capitalised at over 10 times this. But what is likely to worry a value investor such as Graham is the lack of assets providing a suitable safety net.

The company is priced at around 15 times its net current asset value. A current ratio of just 0.8 suggests M1 has significant debt obligations while a price-to-book of 10 would offer no margin of safety. To see a book value below one the share price would need to take a tumble of 90% to just 42 cents.

Having taken a closer examination you might have come full circle to deciding that M1 is presently not a value share. However, that may not be due to the same reasons you initially thought. Rather it may be that the risks appear to outweigh the potential rewards in this case.

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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 contributor Adam Kuo doesn’t own shares in any companies mentioned.