US equities were mixed overnight as market participants assess the impact of deteriorating US-China trade relationship following a white paper released by Xinhua news agency on Monday.

Hang Seng Index, one of the few Asian indices that opened on Monday, lost 1.62% yesterday. Singapore’s Straits Times index showed resilience against this headwind, backed by rising crude oil prices.

In the White Paper, Beijing accused Washington for ‘contradicting itself and constantly challenging China’ and causing ‘serious damage’ to trade relations. Right now, an economic ‘cold war’ is hurting half of all US imports from China. President Trump repeatedly threatens to put the remaining half, or about US$ 267 billion Chinese imports onto his tariff list, even at the expense of US consumers.

IMF, banks and rating agencies were busy calculating the quantitative damage that an escalating trade war could potentially bring to the economy, and thus the stock market. The collateral damage is more likely to emerge in 2019, when 25% tariffs kick in on bulk imports shipping to the US. Before that, commercial entities may choose to build inventory before the winter comes, resulting in a boom in trading activities before the Christmas holiday season.

Singapore’s Keppel Corp and SPH have re-entered into a potential divestment talk relating to their stakes in M1 – Singapore’s third largest telco player on Monday. This is their second attempt following unsuccessful strategic review in July last year. Last year, M1’s share price plunged in July following the end of the strategic review as the deal didn’t meet the criteria sought by the sellers. M1’s share price has fallen almost another 20 percent since then. Both M1 and Keppel T&T are in trading halt until further notice.

M1’s three major shareholders – Malaysia’s telco operator Axiata, Singapore’s Keppel Corp and SPH account for more than 60% of M1’s total shares outstanding.

Singapore’s telco players have suffered from intensified competition and saturated local market over the past four years, and smaller players namely M1 and StarHub are more vulnerable to the headwind due to lack of diversification . M1’s Earnings Per Share (EPS) has been declining over the past few years and their cash dividend recorded has been dropping as well. M1 has lost almost 60% of its market value from its peak seen in 2015, when its share price declined from S$3.99 to last closing at S$1.63.

Yesterday’s announcements brought renewed hope for potential sale transactions, despite both Keppel and SPH saying ‘there is no certainty or assurance’ of any transaction will occur. Both SPH and Keppel Corp’s share prices remained flat on Monday.

In an event of major shareholders’ transactions, investors may expect some form of consolidation in the local telco space. Telco is not Keppel or SPH’s core business and therefore, divestment in M1 could allow them to focus on areas of strength. For Axiata, they could raise fund via divesting its stake in M1 and invest in other growing markets such as India.

Now the biggest question surrounding investors might be, who is the potential buyer? Yet we have very little visibility of that. If the buyer came from a strategic point of view and could reshuffle M1’s business and create synergy by acquiring its major stakes that could catalyse positive price movements after trading halt is lifted. A failure to close a deal, however, could result in disappointment and probably trigger a new round of sell-off.

Singapore Telco comparison

 Market Cap (SGD)EPS - 1 Yr GrowthP/EROEDVD 12M YldDVD Payout ratio
M1 Equity1.51B-12.45%11.1629.11%6.83%79.78%
StarHub Equity2.96B-25.47%14.3773.98%9.36%133%
SingTel Equity51.44B-4.85%9.5412.85%6.51%61.38%

M1's major shareholders

 % of shares outstandingMarket value (mil SGD)
Axiata28.68%432.6
Keppel Corp19.32%291.46
SPH13.45%202.86
Total61.45%926.92

Source: Bloomberg

M1 Limited

By Margaret Yang in Singapore

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