2023-07-25 07:47:55 ET
Summary
- Millicom International Cellular's net income fell 87% in Q1 2023, causing a 15% drop in share price; however, the company is pursuing growth opportunities and restructuring for long-term profitability.
- The company's Project Everest is expected to result in $50 million in net savings in 2023 and $100 million in 2024, significantly impacting the company's profitability.
- Despite potential risks such as discounting and foreign exchange challenges, I believe Millicom's stock is a buy due to its growth potential and depressed valuation.
Millicom International Cellular ( TIGO ) is a telecommunications services provider headquartered in Luxembourg. The company provides mobile and fixed-line services, cable and satellite TV, cloud solutions, mobile financial services, and broadband. They are known for their operations in Latin America under the Tigo brand. The company was founded in 1990 and operates in several countries, including Bolivia, Colombia, El Salvador, Guatemala, Honduras, Paraguay, Costa Rica, and Nicaragua.
On the surface, Millicom had a challenging Q1 2023 , with net income falling 87% versus the prior year from $23 million to $3 million. The market responded by knocking the share price down more than 15% from a mid-April high of $19.97 to the mid $16s today. I believe this drop was unwarranted. Millicom is pursuing multiple growth opportunities that are starting to see success. In addition, the company has engaged in the Project Everest restructuring with short-term expenses and long-term savings that should make the company solidly profitable.
In addition to the fundamentals, valuation multiples are very depressed relative to performance, and quant ratings are dragged down by Q1 performance. I rate this stock a buy and think now is an excellent time to add Millicom to your portfolio.
Pursuing Multiple Growth Opportunities
Millicom is pursuing growth opportunities on multiple fronts. The first is business-to-business (B2B). While all business units grew in Q2, B2B posted an impressive 6% growth in service revenue and an even stronger 28% growth in digital service revenue. Management had to put this sector on the backburner during COVID , but now the early investments are paying off. I really like B2B in telecom as it tends to be a higher margin with longer-term contracts, minimizing the impact of churn.
Millicom B2B Growth Q1 2023 (TIGO Investor Relations)
Beyond B2B, Millicom is successfully growing the TIGO postpaid business, with eight straight quarters of organic service revenue growth and 8.8% growth in Q1 2023. Latin America is heavily weighted towards prepaid, so moving customers to higher margin post-paid service is an accomplishment.
Millicom Postpaid Q1 2023 (TIGO Investor Relations)
Lastly, while a smaller business, TIGO money saw growth skyrocket to 16.3% in Q1 2023, and Panama is coming online in Q2 2023. Monetary services help brands become part of everyday life and make consumers "stickier" to their wireless provider. While this growth has less of a nominal impact, I am bullish on the halo benefit to the core business.
TIGO Money Q1 2023 (TIGO Investor Relations)
Restructuring Should Generate Solid Profits
Millicom International Cellular's Project Everest is a comprehensive program to improve the company's efficiency and financial performance. Initiated in Q1 2023, Project Everest focuses on enhancing efficiencies in various areas, including convergence, commercial opex, network opex, IT, and capex.
The project implementation involves some restructuring costs. One instance of Project Everest's direct impact was in Colombia, where EBITDA declined by 3.8% due to $7 million in severance payments related to the project. This indicates that the project involves workforce restructuring as part of its efficiency measures. Management noted in the earnings call that one-time expenses should be behind them after Q2 2023.
Project Everest is expected to result in $50 million in net savings for Millicom within the year 2023 and $100 million in 2024 and beyond as implementation costs decrease and savings are recognized. These savings are significant enough to impact the company's three-year financial targets .
An additional benefit of Project Everest, management committed to generate $500 million in equity free cash flow from 2022-2024, with the potential of another $100 million pending a partnership in Colombia.
Revenue growth notwithstanding, Project Everest will park Millicom's profitability solidly in the nine digits, in addition to the benefit of improved cash flow. Millicom hasn't seen that kind of profitability, excluding special items, since 2015. I believe that a successful execution, which is already underway, will drive significant upside potential.
Market Overreaction To Q1
Millicom is down over 15% since Q1 2023 earnings were released. I believe the April 2023 price in the high $19s was fair, supported by depressed valuation multiples today and the quant ratings with a slight adjustment.
Let's start by looking at valuation multiples . On the revenue side, EV/Sales of 1.77 is down 2% to the market and 19% from the historical average. With three different avenues for growth, I feel that Millicom can exceed its competitors and historical performance.
On the cost side, EV/EBITDA is 4.65, down 52% to the sector and 28% to the historical average. Considering that Millicom has Everest benefits moving forward, and the valuation multiple is already depressed, I see an upside to the stock price on profitability.
The quant rating gave me pause, as it is a solid hold. However, valuation, profitability, and momentum are all in the buy range, with revisions and growth driving the hold. I will give it revisions as Millicom had to slightly pull down their estimates from Q1 2023 due to spectrum acquisition and cost of debt, as we will discuss below in downside risks. Given Project Everest, I feel that the growth rating of C deserves an adjustment. EBITDA, EBIT, and EPS growth rates are rated in the D range, but Q1 2023 was the high quarter for restructuring costs. In my opinion, this is exactly what the market missed as well. With an adjustment for Everest, I feel the quant rating would have moved to Buy.
Millicom Quant Rating (Seeking Alpha)
Downside Risk
Downside risk associated with investing in Millicom includes potential ARPU issues due to discounting, foreign exchange challenges, and billions of dollars in debt maturity in the near future. In the pursuit of subscriber growth, discounting could lead to decreased revenues from customers as prices drop, while foreign exchange rate fluctuations have the potential to create financial instability. Finally, Millicom's substantial debt load has billions of dollars maturing soon, possibly leading to further financing costs and debt restructuring. While it is important to consider these risks when evaluating an investment in Millicom, I believe the growth potential and low valuation sufficiently offset the risks.
Verdict
Millicom's potential growth opportunities and cost restructuring seem to outweigh the risks, making it a favorable stock for investors. Although its debt levels remain high, management has taken steps to restructure and reduce costs to generate profits and increase cash flow. Millicom's stock price was driven down by an overreaction to Q1 results, and valuation multiples are depressed. I rate this stock a buy and believe now is an ideal time to add Millicom to your portfolio.
For further details see:
Millicom International Cellular Has Numerous Paths To Growth