Is M1 underappreciated?

Telecommunications in Singapore

Introduction

Info communications has always been a vibrant global business where intense competition, rapid technological advancements and business innovations have created an abundance of new business opportunities and generated new value-added services. With more technological breakthrough comes more innovative, high quality and cost-effective services to the extent that a small country like Singapore has become highly reliant on the globally competitive telecommunications sector to develop itself as a prominent knowledge-based economy and vibrant infocomms hub in the Asia Pacific. In fact, technological advancement with little improvements these days is beginning to make innovation today seems common and merely felt like variants of past technologies.

The telecommunications industry in Singapore is said to be very saturated which resulted in an oligopolistic market dominated by three players, SingTel, M1 and Starhub. This has created a highly competitive nature where each player can only differentiate from one another with unique selling points. For the scope of this article, M1 shall be the company of interest.

Industry Dominant Economic Traits

As technology accelerates faster than the replacement rate of mobile phones, consumers are shifting their demands and expectations to greater innovations. With three main players in the market, M1, SingTel and Starhub, competition on product innovation is very high as these competitors constantly pursue first-mover advantage in providing consumers with better coverage, faster internet speed and improved services. In 2014, M1 commands only 24.5% of the market share while Starhub and SingTel holds 38.2% and 37.2% respectively. These players place themselves at the hyper-competitive stage in the industry life cycle where they operate in a creative destruction environment by rejuvenating their growth with any slightest improvement in telecommunication networks. Since the bulk of their revenue comes from post-paid plans, we take the average of the different plans each Telco has to design the following grid diagram to show how these Telcos are seen to position themselves where the closer the strategic groups, the more intense the cross-group rivalry.

Table 1 - Market Shares of Telecommunications Companies in Singapore
Table 1 – Market Shares of Telecommunications Companies in Singapore

With such intense competition, it makes the telecommunications industry highly unattractive for new entrants. It requires sellers to respond to their rivals’ choices yet rivals are responding to the seller’s choice concurrently. There is usually tension between corporation and self-interest. Nonetheless, from the price plans set by these firms, it is clear that they have chosen to co-operate rather than a cut-throat ideology.

Industry Analysis

The purpose of this framework is to relate the intensity of the competition and the five forces to the attractiveness of the industry. See Michael Porter’s 5 Forces illustrated below.

Michael Porter Five Forces

Bargaining Power of Buyers: HIGH

As the three incumbents sell the same type of product, mostly without much price differentiation as well, buyers tend to have the option of exploring other Telcos once the contract of 2 years is up. It is only if consumers do not like their telco’s standard of services would they face high cancellation fees when thinking of signing up another. Other than that, it is hard to deny that their services are indeed readily replaceable.

Degree of Rivalry: HIGH

The degree of rivalry between the three Telcos has always been close. Since the bulk of the three Telco’s revenue comes from post-paid plans, Table 2 below shows their 4G Post-paid Packages in comparison. SMS was deliberately left out because with Whatsapp, Line and other data messaging services out there, it seems quite unlikely that anyone can exceed more than 1000 messages.

Table 2: 4G post-paid plans comparison
Table 2: 4G post-paid plans comparison

Subscription Price: Despite being priced relatively close to one another, M1 clearly has the lowest pricing per tier compared to the other two Telcos. There is no difference in pricing between Starhub and Singtel except for the last tier.

Voice/Video calls: M1 and Singtel’s voice/video calls mirrors one another except for Tier 5. Starhub on the other hand, has more varied outgoing minutes. However, each Telco has different plus points as noted:

  • M1 has unlimited free calls to 3 M1 numbers
  • Starhub has free 300 minutes of talktime with Happy Talk
  • Singtel allows users to enjoy an additional 200 minutes of free local calls with an additional subscription fee of $10.70/month or unlimited talk time with an additional subscription fee of $19.90/month.

Data: From table 1, it can be seen that for the first four tiers, M1 and Starhub offer a higher 4G data bundle than Singtel. After which, the data bundle between Starhub and Singtel mirrors each other with M1 continuing to maintain the higher 4G data bundle limit.

Of course, if consumers were to exceed their data limit, there would be over-usage charges where all three Telcos charge $10.70/GB for excess usage. The only difference is how much would they be capped at. From table 1, M1 charges the highest maximum charge, exceeding Singtel’s by only 32 cents while Starhub has the lowest cap at $168/month.

As such, these players can only compete for customers with better coverage, faster internet speed and improved services. It ultimately depends which are the unique selling points they have to differentiate from one another.

Threat of Substitutes: LOW

There are very little substitutes in the market because buyers do not have many options to switch and shop around, allowing all Telco providers to hold substantial power over consumers. In an era of extensive technological advancement, for competitors to match up to one another in terms of technology is said to be relatively easy.

Bargaining Power of Suppliers: LOW

Suppliers in the telecommunications industry provides only the tangible items such as alcatel phone or routers. In Singapore, there are only three telecommunication companies in which they can provide their services to and if they were to still be selective to whom they want to provide their hardware to, then they might be potentially losing out. Besides, the switching cost for any Telco to an alternative supplier is relatively low, hence it is very hard for suppliers to gain any substantial bargaining power.

Threat of New Entrants/Emerging markets: LOW

Telecommunications is an expensive business where the biggest entry to barrier is it takes a huge sum of cash requirements to set up a telecommunications network which needs updating every now and then to avoid being obsolete. Besides where licenses are not easily approved by IDA, hence the threat of new entrants/new markets to M1 is likely to be low to negligible.

Company Analysis

Table 3: SWOT analysis of M1
Table 3: SWOT analysis of M1

As depicted above, M1 does have a couple of strengths to create customer value regardless of the age group their consumers might be in. However, being the telco with the smallest market share, it is harder for M1 to gain brand loyalty as compared to customers who have started off and remained in Starhub/SingTel even after 20 years.

Despite that, M1 has a very strong focus on customers’ needs. With the population in Singapore growing, it is not unlikely to see the customer base in M1’s mobile market grow as well. This is provided that a 4th telco has yet to establish itself fully, otherwise in a saturated market like Singapore’s, M1’s small market share could very well be compromised.

Financial Stability

Though the growth rate of the M1’s revenue has been rather gradual, some financial ratios calculated can still be used to deduce the financial health of M1.

M1 financial data
Table 4: Financial data from M1 Annual Reports

A comparison between the three telecommunications service providers exhibited an average Return on Assets (ROA) of 19 percent over the past five years, indicating a good sign of M1’s management’s efficiency at using its assets to generate income.

Return on Equity (ROE) are also consistently high, averaging around 48 percent over the past five years. A relatively higher ROE of 44.52% at the end of FY2014 also led to higher stock prices, thus increasing the net worth of shares in the Company.

The Price-to-Earning (P/E) ratio interprets how much an investor pays for every $1 the company earns. Taking the industry average of 16.5 from the P/E ratios of the three players, M1 appears to be just very slightly undervalued.

Table 5 - M1 Liquidity Ratios
Table 5 – M1 Liquidity Ratios

The profit before depreciation & amortization/current liabilities (PDACL) ratio indicates that M1 has very minimal insolvency risks as it has a relatively high margin of safety to meet its short term obligations.

The operating cash flow/current liabilities (OCFCL) ratio is another indicator that M1 is also able to generate sufficient cash to meet its obligations in the near future.

The average dividend per share paid out by M1 over the past 5 years stand around 14.84 cents. At time of writing, M1’s share price is standing $2.90 with a dividend yield of 6.47 percent which is higher than SingTel’s (4.67 percent) and Starhub’s (5.52 percent).

 

Disclosure: I do not have any positions in any M1 stocks at time of writing and have no plans to initiate any positions within the next 72 hours. I wrote this article myself and I am not receiving any paid compensation for it. I have also no business relations with any company whose stock is mentioned in this article.

References

CNA. 2015. “MyRepublic launches 4th telco campaign, invites public to test mobile network.” ChannelNewsAsia.

Hussainey, K., Mgbame, C.O. and Mgbame, C.A.M. 2011. “Dividend policy and share price volatility.” The Journal of Risk Finance. ISSN 1526-5943. Volume 12. Issue 1. Pg 57-68.

IDA, 2015. “Full competition in Singapore’s Telecommunications Sector.”

Lee, A. 2015. “M1 has best 4G connectivity: IDA data.” Channel NewsAsia.

M1 Annual Reports FY2010 – FY2014.

Ong, H.H. 2015. “Singapore’s population is 5.54m as of June, slowest growth in more than a decade.” Straits Times.

Singtel Annual Reports FY2011 – FY2015

Starhub Annual Reports FY2010 – FY2014.

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