M1 will pay up to $17.9m (of which $3m is subject to financial targets being met) for Qala, a nine-year old SBO-based ISP originally seeded by Creative Technology but owned largely by two individuals. It provides data and communications services to corporate customers almost exclusively, while in its consumer business, subsidiary QMax is one of three providers of the free nation-wide 1Mbps WiFi service, Wireless@SG.
Qala’s profits are currently negligible compared to M1 but it will allow M1 to provide SMEs with a cheaper alternative to SingTel, which monopolizes the data and telecom needs of companies operating in non-CBD areas. In addition, Qala will be able to cross-sell M1’s consumer Internet services, such as its 7.2Mbps wireless broadband. M1 anticipates minimal capex - no network investment will be needed while backend support can be combined with its existing consumer facility.
We reckon the innovative MiFi device could have a positive impact on M1’s market share in mobile broadband, which stood at 137,000 (dongles only) as at Jun 2009 (estimated to be 25-30% market share). M1 is the first telco in Asia to launch this device. As it allows up to five devices to be simultaneously connected at 7.2Mbps download speed, it may even prompt existing dongle users to switch, depending on the prices for the device and data plans, as well as supplier exclusivity.
We reiterate our view that M1 will have the biggest upside once NGNBN comes online. Its acquisition of Qala is a credible step in filling up its lack of a corporate business, and will give it upside beyond the consumer business alone. We will start to model in NGNBN benefits once there is more clarity. Target price is raised to $2.18 (13x FY09) with higher peer valuations. M1 is still attractive at 7.2% yield. Maintain BUY.
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