Here’s Why There May Not Be Much Reasons To Invest In M1 Ltd

The telecommunications industry in Singapore is very saturated.

For a taste of just how bad it is, consider this: The mobile penetration rate is nearly 150% now. What this means is every person in Singapore is an owner of an average of 1.5 mobile phones.

With such figures, it’s not unreasonable to imagine that telecommunication companies here need to compete very aggressively for customers. For telcos with Singapore-centric businesses like Starhub Ltd (SGX: CC3) and M1 Ltd (SGX: B2F), the situation’s made worse as they do not have the luxury, like Singapore Telecommunications Limited (SGX: Z74) has, of depending on the mobile markets of other countries for growth.

All these gives us a backdrop to understand why there might not be strong investing merits when it comes to M1.

The fierce competitiveness within the mobile space has led to M1 losing chunks of mobile customers. To that point, the company’s total mobile customers had fallen by 12.2% in 2014 to just 1.85 million.

Competition, as tough as it already is, looks set to heat up yet further with the authorities keen to open up the telecommunications sector here for the entry of a fourth telco. This may spell trouble for M1 given that it has not had the best track record of growth even when there were just two other competitors to contend with.

From 2010 to 2014, M1’s profit had only increased by 2.86% annually and the revenue and dividend situation isn’t any better. You can see all these in the table below:

M1's revenue, profit, and dividends

Source: S&P Capital IQ

M1’s best hope for growth is an increase in the market for data consumption. But even so, the firm would likely not be able to grow faster than the market itself.

These mean that investors in M1 would need to set their expectations properly: The company will not be a growth play with fast-growing profits and dividends. Instead, what it might be is a share that can distribute consistent dividends over the near future given its recurring revenue base and its policy of paying out a high percentage of its profit as dividends (it’s 80% in 2015).

But even so, given M1’s huge loss in the number of mobile customers recently, investors might want to be wary about the long term prospects of the company. Investors should carefully consider M1’s ability to compete in the industry in the future, especially if a fourth telco’s entering the picture.

Foolish Summary

None of the above is meant to say that M1 will necessarily be a poor investment going forward. But, given the present situation, there may not be that much to like about M1 as an investment beyond its highly attractive dividend yield of 5.7%, the highest amongst the telcos in Singapore. Investors would need to consider both the risks and potential rewards involved with the firm.

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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 writer Stanley Lim doesn’t own shares in any companies mentioned.