MobileOne - Qala buy to boost strength in corporate broadband

M1 is acquiring Qala Singapore Pte Ltd, an Internet Service Provider focused on the corporate, enterprise and public sector markets in Singapore. Qala has a Service Based Operator (SBO) licence with a staff strength of less than 100.

M1 will be paying S$14.9mil when the deal is scheduled to be completed in a month’s time, and will pay another $3mil upon the satisfaction of certain financial targets for its financial years till 30 June 2011. While its profitability is not disclosed, Qala’a net book value of $2.8mil works out to price-to-book valuation of 5.3 to 6.4x, lower than M1’s 6.7x at 1H09.

More important to note, M1 is buying Qala’s ready base of corporate customers to gain a faster breakthrough in the fixed broadband market. This is in preparation for its entry as a Retail Service Provider (RSP) in the Next Generation National Broadband Network (NGNBN) when commercial services launch in 2Q2010. The bulk of Qala’s corporates are small and medium enterprises (SMEs) typically with employee count of less than 100.

We view the deal to be positive for M1, immediately boosting its experience and knowledge base in the SME market with fixed broadband services. A year ago, M1 started to venture into the fixed broadband market as a reseller. In 1H09, M1 reaped a mere $0.8mil in revenues from this new segment - pittance, against total service revenues of 347.4mil.

At the same time, with a new pool of corporate names, M1 would also be able to cross-sell its mobile services into the enterprise arena. To-date, the corporate segment still accounts a small portion (we estimate less than 10%) of M1’s revenues. Typically, a corporate mobile user is less price-sensitive and commands higher ARPUs.

Apart from higher call volumes, usage of IDD, roaming as well as data, boosts ARPU. By comparison, M1’s postpaid monthly ARPU was $60.2 in 1H09, while StarHub’s was $68, and SingTel’s $83 across 1QFY10 and 4QFY09 (YE March).

As buying Qala improves M1’s market positioning and strength as an RSP in the NGNBN, we have upgraded our fair value by 8% to S$2.18, on revising terminal growth from -5% previously to -4%. M1 shares have risen 11% since our 17 July results note, and we maintain our BUY rating, as current price offers a 23% upside to revised fair value.

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