Keppel Corporation Limited May Sell Stake in M1 Ltd? 4 Simple Charts to Show Why It May Be a Bad Idea

Lately, there has been talk in the media (see here and here) about Keppel Corporation Limited (SGX: BN4) potentially selling its stake in Singapore’s smallest telco M1 Ltd (SGX: B2F).

According to M1’s latest annual report, Keppel Corp, whose main businesses are in offshore marine engineering and property development, has a 19.15% interest in the telco (as of 2 March 2015).

If a sale happens, it may help Keppel Corp improve its financial position amid an environment of painfully low oil prices (the price of oil is currently around US$30 per barrel, down from over US$100 in mid-2014). The collapse in the fuel’s price has caused some of the customers in Keppel Corp’s oil & gas-related business to delay order-deliveries and even fall into severe financial difficulties.

Given this backdrop, it may be understandable if Keppel Corp wants to look for opportunities to raise cash through the sale of non-core assets. But, it may still be a really bad idea if Keppel Corp ends up selling its stake in M1 now.

The investor’s cardinal sin is to “buy high and sell low.” If Keppel Corp really were to sell its near one-fifth interest in M1 at current prices, the company may be committing the latter-half of the investor’s cardinal sin. The four charts below will give you an idea why.

Here’s Chart 1, plotting M1’s share price over the past five years since the start of 2011:

Chart 1 - M1's share price since start of January 2011
Source: S&P Capital IQ (click chart for larger image)

Chart 2 shows M1’s price-to-earnings (PE) ratio for the same period:

Chart 2 - M1's price-to-earnings (PE) ratio since start of January 2011

Source: S&P Capital IQ (click chart for larger image)                                  

Then, you have Chart 3, which illustrates M1’s price-to-book (PB) ratio, again for the same timeframe:

Chart 3 - M1's price-to-book (PB) ratio since start of January 2011
Source: S&P Capital IQ (click chart for larger image)

Finally, we have Chart 4 tracing out M1’s price-to-sales (PS) ratio from January 2011 to today:

Chart 4 - M1's price-to-sales (PS) ratio since start of January 2011
Source: S&P Capital IQ (click chart for larger image)

So, what the four charts tell us is that the share price is not the only thing that’s near a five-year low with M1 – the telco’s valuation metrics are also near multi-year lows. In other words, should Keppel Corp sell its stake in M1 at current prices, it may be getting rid of an asset at a really low valuation.

To be clear, a look at M1’s historical PE, PB, and PS ratios isn’t sufficient to determine if the telco’s currently at a bargain price or not; it would also heavily depend on the firm’s future business performance. Admittedly, there may be serious obstacles for M1 to overcome in order for it to grow its business. That’s especially so when we factor in the possible entrance of a fourth telco player in the near future to challenge the incumbents.

But, given M1’s attractive valuations now in relation to history, Keppel Corp may want to really give the matter of selling its stake in M1 some careful thought, lest it makes a big mistake by selling low.

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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 companies mentioned.