Is M1 Ltd A Bargain Right Now?

Singapore’s smallest operational telco, M1 Ltd (SGX: B2F), has seen its stock price fall from an all-time high of around S$4 in March 2015, to S$1.79 right now. That’s a decline of over 50%, and begs the question: Would the company be a bargain stock at the current price?

There is no easy answer, but we may be able to find some clues from an investing checklist that the legendary investor Peter Lynch shared in his book One Up On Wall Street.

Lynch ran the US-based Fidelity Magellan fund from 1977 to 1990 and racked up an incredible annualised return of 29%. In One Up On Wall Street, Lynch wrote about a general checklist he had used when he was searching for investing opportunities. Let’s run M1 through the checklist and see what turns up.

1. The Price-Earnings ratio: Is it low or high for this particular company and for similar companies in the same industry (generally, low PEs are preferred)?

Right now, M1 has a PE ratio of 12.5. The chart below shows the telco’s PE ratio over the past five years, and you can see that the company’s current valuation multiple is clearly near a five-year low. This suggests that M1’s PE is low.

Source: S&P Global Market Intelligence

Meanwhile, M1’s larger local peers, Singapore Telecommunications Limited (SGX: Z74) and StarHub Ltd (SGX: CC3) have trailing PE ratios of around 17 (after adjusting for a one-off gain from the spin-off of NetLink NBN Trust (SGX: CJLU)) and 17.6, respectively. These numbers also suggest that M1’s PE is low.

2. What is the percentage of institutional ownership? The lower the better.

This criterion was added by Lynch because he thought that companies that were not noticed by institutional investors (big money managers) tended to make for better bargains.

In the case of M1, as of 22 February 2017, it counted Khazanah Nasional Berhad and Temasek Holdings among its largest shareholders. Khazanah, which is the sovereign wealth fund of Malaysia, had a 28.54% stake. Meanwhile, Temasek, one of the Singapore government’s investment arms, and one of the largest sovereign wealth funds in the world, had a 20.96% stake. These numbers point to M1 having a high level of institutional ownership.

3. Are insiders buying and whether the company itself is buying back its own shares? Both are good signs.

Over the past six months, there have been no instances of insider buying, or the company repurchasing shares.

4. What is the record of earnings growth and whether the earnings are sporadic or consistent?

Here’s a record of M1’s earnings over the past decade from 2006 to 2016:

Source: S&P Global Market Intelligence

M1 has been consistently profitable for a long period of time. But, it’s also striking that there has been no sustained growth trend. In fact, M1’s earnings per share in 2016 was lower than in 2006.

5. Does the company have a strong balance sheet?

Based on its latest financials as of 30 September 2017, M1 had S$52.1 million in cash and equivalents, and S$450 million in total debt. This leaves a net debt position of S$397.7 million. But for a telco that has generated S$91.4 million in free cash flow in the first nine months of 2017, a net debt position of S$397.7 million does not seem to be excessive.

A Final take

On the positive side, M1 has a PE ratio that’s at a five-year low and lower than its peers, a good record in generating profits, and a reasonably strong balance sheet. The negatives are a high level of institutional ownership, a lack of buybacks and insider buying, and a lack of consistent profit growth.

Looking at the results, Lynch may have some interest in studying M1 further. But in any case, it’s worth noting that Lynch’s checklist, as useful as it may be, should only be seen as an informative starting point for further research.

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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.