The Better Telco Stock: M1 Ltd vs. Maxis Berhad

Singapore’s stock market has three telecommunication companies in Singapore Telecommunications Limited (SGX: Z74), StarHub Ltd (SGX: CC3), and M1 Limited (SGX: B2F). That isn’t a lot to choose from.

One way to solve this choice conundrum would be for investors here to look across the Causeway at the Malaysian stock market. With nearly 1,800 stocks listed there, investors in Singapore would have a lot more stocks to pick from as compared to the 771 that are listed here as of November 2015.

With that in mind, how might M1 fare against Maxis Berhad (KLSE: 6012.KL) as an investing opportunity? Both companies are domestic stories (M1 only does business in Singapore whereas 96.8% of Maxis’ revenue in 2014 had come from Malaysia), so there are strong similarities between them.

Some useful things we could compare between the two stocks are their valuation numbers (things like the price-to-earnings and price-to-book ratios), returns on equity, ability to generate free cash flow, and balance sheet strength.

Valuation numbers

The stock market works on a simple premise: You can stack the odds of success in your favour if you buy stocks when they’re cheap and hold them for the long-term. That’s why it’s important to have a feel of how a business is valued in the stock market.

M1 and Maxis - PE and PB ratios
Source: Source: S&P Capital IQ (click chart for larger image)

Based on M1 and Maxis’ current stock prices of S$2.74 and RM6.60, respectively, I trust it’s obvious to see from the chart above that the Singapore telco has the lower price-to-earnings (PE) and price-to-book (PB) ratios.

Return on equity

This metric tells us how efficient a company is in churning out a profit with each dollar of shareholder’s capital that it has. The return on equity can also be a fine gauge of the management-skills that a company’s management team has. To this point, billionaire investor Warren Buffett once wrote: “We believe a more appropriate measure of managerial economic performance to be return on equity capital.”

The chart below illustrates how M1 and Maxis’ returns on equity have looked like since 2010.

M1 and Maxis - Returns on Equity (ROE)
Source: S&P Capital IQ (click chart for larger image)

M1 comes out tops again when compared to Maxis with its superior returns on equity.

Ability to generate free cash flow

Free cash flow is a very important number when it comes to investing. It is the actual cash brought in by a company’s operations that’s left after the firm has spent the necessary capital needed to maintain its businesses at their current state (this is known as capital expenditures).

A company can use its free cash flow to benefit shareholders in a number of different ways including buying back stock, paying dividends, strengthening the balance sheet, and investing for future growth.

M1 and Maxis - Free cash flow (FCF)
Source: S&P Capital IQ (click chart for larger image)

Both M1 and Maxis have been adept at generating free cash flows from their businesses over the past few years. And so, it’d be a tie here.

Balance sheet strength

Debt, especially when it’s present in large amounts, weakens a firm’s financial health and adds risk to the equation for investors. This is why it’s important for investors to watch how a company’s balance sheet evolves over time. If you find that a company is biting off more than it can chew when it comes to debt, then it may be time to bail.

In the case of our two telcos, M1 has the stronger balance sheet at the moment. As of 30 September 2015, M1’s net-debt (total borrowings minus cash & equivalents) to equity ratio stood at 88% whereas Maxis’ selfsame figure was 210%.

That being said, while M1 has the relatively stronger balance sheet, a net-debt to equity ratio of 88% is not exactly low either. The saving grace for M1 here is that as a telco, it has stable revenue sources and so, can afford to take on more debt.

A Fool’s take

In a round-up of the scores, M1’s the clear winner here as it had bested Maxis in three of the four categories we were looking at.

It should be noted though that what you’ve seen above shouldn’t be taken as the final word on the investing merits of the two companies. Instead, it serves mainly as a useful starting point for further analysis.

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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 Chong Ser Jing doesn't own shares in any company mentioned.