M1 Ltd Is Near A 52-Week Low – Can It Rebound Soon?

The last 12 months haven’t been kind to Singapore’s stock market as seen in how the Straits Times Index (SGX: ^STI) has slipped by 15%.

As bad as a double-digit fall in the market barometer has been, there are stocks that have fared worse and one such example is M1 Ltd (SGX: B2F).

Based on its closing price of $2.70 yesterday, M1’s shares have fallen by a quarter compared to a year ago and are sitting just nine cents higher than a 52-week low of $2.61.

M1 is the smallest company within Singapore’s telecommunications sector behind Singapore Telecommunications Limited  (SGX: Z74) and StarHub Ltd (SGX: CC3). As a telco, M1 derives its revenue from four main business segments, namely, mobile services, fixed services, international services, and handset sales.

With that, let’s dig into some of the possible reasons behind M1’s dismal stock market performance over the past year:

1) Threat of a fourth telco

It is likely that the possible entrance of a fourth telco in Singapore is exciting for consumers – more competition is likely to lead to more (and better) choices.

But, that’s not exactly a healthy development for M1, especially when it is the smallest out of the current trio of incumbents in the Singapore telecommunications landscape, as already mentioned.

2) Weakening balance sheet

As of 30 September 2015, M1 had $26.1 million in cash and equivalents and $351.1 million in debt. This leaves M1 with a net debt position of $325 million – that’s weaker compared to end-2014 when it had a net-debt position of ‘only’ $279 million.

While it is common for telcos to be in a net debt position (telcos have stable revenue sources which gives them the ability to take on leverage to juice shareholder returns), investors may want to pay more attention to M1’s balance sheet given the possibility of higher interest rates in the future.

On a brighter note, M1 has managed to continue generating free cash flow in 2015, to the tune of S$116 million in the first nine months of the year.

3) Lower earnings growth

In its most recent fiscal third-quarter earnings (for the three months ended 30 September 2015), M1 estimated that its net profit for 2015 will experience only “low single digit growth.” This appears to be a downgrade compared to the fiscal second-quarter’s earnings release in which M1 had forecast “moderate growth” in net profit for the year.

M1 had not given any explicit explanations for its lower earnings outlook. But, we can perhaps look toward the reasoning for a similar downgrade in revenue growth from Singtel in its fiscal second-quarter earnings release (also for the three months ended 30 September 2015) from a “mid-single digit level” to the “low single digit level” – Singtel had cited a shift in consumer behaviour from voice roaming services to data roaming services.

Foolish Takeaway

Falling or low stock prices may make shares look like bargains, but investors should not focus solely on prices. It is crucial that we perform due diligence and determine if a share’s underlying business fundamentals are still intact and if its valuation makes sense at current prices.

There are positive things going on with M1. As my colleague Stanley Lim had highlighted recently, M1 is devising new innovative products to grow its business, such as offering its customers unlimited in-flight data roaming on 18 airlines, and expanding its corporate solutions to lure in more corporate customers. But will these new measures help to boost the firm’s bottom-line going forward? Only time will tell.

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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 James Yeo doesn’t own shares in any companies mentioned.