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3 Wise Views on M1 Ltd

Three wise men were blindfolded and led one at a time into a room where an elephant stood. Each was asked to discern what was in the room without removing his blindfold.

The first, upon touching the elephant’s trunk, concluded a “snake” was in the room. The second, upon contacting a leg, concluded a “tree” was in the room. The third, upon grasping the tail, concluded a “rope” was in the room. All were surprised to discover the elephant once their blindfolds were removed.

— old Indian fable

You may have heard this old fable before. The three blindfolded wise men were not able to make a good guess of the complete picture (in this case, an elephant). It can be the same with investing.

For any potential investment, our own view may be limited, and we may miss some major points. We could always do with more intelligent and Foolish perspectives.

To demonstrate, let’s use communication services provider M1 Ltd (SGX: B2F) as an example. The company is the smallest among the big trio in the Singapore telecommunications industry with the other two being Singapore Telecommunications Limited  (SGX: Z74) and StarHub Ltd (SGX: CC3).

M1 divides its business into four major segments: Telecommunications / Mobile Services, International Call Services, Fixed Services, and Handset Sales. You can read more about the telco in here.

With this company, I would like to share three possible views, from three differing investor personalities no less. They are the value investor, the income investor, and the growth investor.

The value investor’s view

At its closing price of $3.26 yesterday, M1 sported a trailing price-to-earnings (PE) ratio of around 17.

Meanwhile the SPDR STI ETF (SGX: ES3) has a trailing PE ratio of 13.5. Since the SPDR STI ETF is an exchange-traded fund tracking the fundamentals of Singapore’s market barometer, the Straits Times Index (SGX: ^STI), we can also say that the average PE in the market is 13.5.

M1’s PE ratio is thus higher than that of the market average and this may dampen the value investor’s enthusiasm for the telco.

Furthermore, M1’s balance sheet carried S$253.8 million in debt and just S$17.8 million in cash as of 31 March 2015. Although debt comes with the territory for telcos in Singapore, the significant borrowings and low cash holdings that M1 has may make it even less enticing for the conservative value investor.

To be fair, M1 does generate a fair amount of free cash flow (more on this soon) and that’s something which may attract the value investor’s attention. But given what we’ve seen earlier – the high valuation and borrowings – M1’s cash flows may not be enough to sway the value guy.

The income investor’s view

The first thing the income would likely notice about M1 is the company’s hefty dividend yield of 5.8%.

The other thing which would likely also catch the eye of the income investor would be M1’s track record with its dividends. Over its past five fiscal years, the company’s annual dividend has generally been rising. You can see this in the table below:

M1's dividend history

Source: S&P Capital IQ

From 2010 to 2014, the telco has also generated stable free cash flow (operating cash flow minus capital expenditures) and this trait might provide financial viability for the share’s dividend payout.

image (1)

Source: M1’s earnings report

The recurring nature of M1’s revenue sources may also offer stability for the company’s business and hence its dividends.

With all that we’ve seen, M1 could be one stock that the income investor would be interested for further research.

The growth investor’s view

On the other hand, the growth investor might having mixed feelings about M1.

Revenue Segments M1

Source: M1’s earnings report

The revenue for the firm’s largest business segment – the telecommunications services / mobile services – has grown at a steady clip over the past five years. That’s a good thing.

But even as its mobile services revenue has grown, M1’s market share in the mobile market (for both postpaid and prepaid) has steadily declined against its competitors. You can see this in the chart below.

2015-06 M1 Slide

Source: M1’s earnings presentation

With mobile penetration rates already close to 150% in Singapore, there may be a limit to how much M1 can grow in the next decade for its local mobile services. In the meantime, growth from its fixed services segment may help, but it remains a smaller contributor to the company’s overall revenue.

Keeping all these in mind, the growth investor might want to give M1 a pass by virtue of its potential lack of growth and above-average valuation (as mentioned earlier).

Foolish summary

So, there you have it. Three quick perspectives from three different investor personalities looking at the same company. Thinking as different investor personalities and coming up with different views can be a useful exercise for us.

Collectively, the differing views may be worth much more than the sum of its parts.

So, do you – Foolish reader – have another company of interest in mind? Why not give the differing views approach a try yourself and then share it with us? We all may become better investors from sharing our motley views.

For more (free!) stock analyses and investing tips, sign up here for your FREE subscription to The Motley Fool's weekly investing newsletter, Take Stock SingaporeIt will teach you how you can grow your wealth in the years ahead.

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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 Chin Hui Leong doesn’t own shares in any companies mentioned.