2023-06-22 01:31:57 ET
Summary
- Latin America's telecom sector is projected to grow by 4.4% from 2022 to 2025, with Millicom being a major player in the market, focusing on countries like Colombia, Panama, and Costa Rica.
- Millicom's debt stands at $6.8 billion, up 70% from 2017, but the company's operating profit has grown at an annual pace of 12.3%, showing potential for improvement and debt management.
- A discounted cash flow model yields a stock price of $53.56 for Millicom, indicating a potential upside for investors, but risks include emerging market challenges and market sentiment.
Thesis
Millicom International Cellular S.A. ( TIGO ) has several areas that require improvement and has not yet fully expanded in the Latin American markets. However, these emerging markets have the potential to provide medium-term returns to shareholders. I conducted a valuation of the stock using a DCF model, which suggests a stock price of $53.56 by 2028. This projection represents a remarkable 229% return compared to the current stock price of $16.26. Additionally, Millicom offers cloud computing services such as IaaS and DaaS through TIGO Business, which could serve as catalysts for further stock price growth if the company decides to expand its presence in this sector.
Moreover, there is the possibility of Millicom becoming a target for a takeover, as demonstrated by the recent interest shown by Apollo Global Management ( APO ), who expressed their willingness to acquire Millicom for $10 billion. Although this deal was eventually terminated , the fact that a major firm like Apollo was interested in acquiring Millicom suggests the potential for other firms to consider a similar move. Such a development would provide immediate returns for shareholders.
Market Overview
In Latin America, there is still significant work to be done regarding the adoption of 5G . The interest of governments and companies in this technology has led governments to be willing to assist the private sector in its adoption. It is projected that 5G subscriptions will increase from the current 19 million to 49 million. Additionally, fiber infrastructure is not yet widely available, but it is estimated to reach a 75% share by 2027.
The projections for 2025 indicate that the revenue of the Latin American telecom sector will reach $73.6 billion, representing a growth of 4.4% compared to the $65 billion in 2022.
In the past, Millicom primarily focused on the African markets. However, these markets proved to be unstable and unsuitable for establishing a long-term business. As a result, Millicom has shifted its focus to the Latin American markets and completely exited the African market, albeit at the expense of acquiring debt.
Markets in Which Millicom Operates (2022 Annual Report)
Millicom's two most significant markets, Guatemala and Colombia, collectively account for 53% of its revenue. However, the long-term prospects for the Guatemala market are uncertain due to recent corruption issues. Former president Jimmy Morales dissolved the anti-corruption agency that played a pivotal role in the country's remarkable progress against corruption.
In contrast, Colombia, Panama, and Costa Rica are the most stable markets for Millicom. Furthermore, if El Salvador successfully continues its fight against corruption and crime, it has the potential to become another stable market for the company. Expanding into Peru, Ecuador, and Chile would be a strategic business move for Millicom, as these countries are also relatively stable and offer significant potential for economic development, however those plans would need to wait if Millicom doesn't want to harm its balance sheet.
Weight of Each Country in Millicom's Revenue (2022 Annual Report)
Millicom also faces challenges due to the multitude of currencies in the region. Unlike the United States or the European Union, where a single currency dominates, Latin America experiences a general downward trend in its currencies compared to the U.S. Dollar. This necessitates the need for hedging strategies, and countries like El Salvador and Panama serve as dollar generators.
Moreover, based on personal experience, I have observed that Millicom employs deficitary practices to attract new customers. It seems that their employees are focused on acquiring new customers at all costs. The issue with this approach is that many individuals contact Millicom and express their "willingness to subscribe to TIGO internet or TV services", but they often request special offers or discounts. Remarkably, regardless of one's negotiation skills, it is almost always possible to obtain a discount. If a customer asks for a significant concession, the sales agent will escalate the request to their superiors, who frequently approve such deals. However, it is worth mentioning that this practice is not exclusive to Millicom; it also occurs with their major regional competitor, Liberty Latin America Ltd ( LILA ).
When discussing Liberty, I would like to present the market share of each company in the markets they operate. Since this article focuses on Millicom, I will only compare Millicom's performance in the markets where it operates, which are fewer in comparison to Liberty.
In the following graphs, you will observe that Liberty surpasses Millicom in terms of mobile broadband. This is largely due to their superior connectivity, particularly in remote areas of the country. For instance, here in Panama, they have significantly better connectivity. Additionally, Liberty's overall strength in Panama has increased thanks to their acquisition of Claro from América Móvil S.A.B. de C.V. ( AMX ).
Now, let's shift our attention to Residential Broadband. In most markets, Millicom outperforms Liberty, despite the fact that Liberty has fiber-optic infrastructure spanning multiple countries, such as Panama. However, Millicom has plans to deploy its own fiber network by the end of this year, 2023.
Moving on to Pay-TV, we can observe that Millicom holds a significant advantage in many markets, with the exception of Nicaragua, where Millicom and Liberty are almost on par. Millicom's strength lies in TIGO Sports, a sports channel that offers superior quality compared to other sports channels. This exclusivity has made customers reluctant to switch their Pay-TV provider, as they have already adapted to TIGO Sports. Furthermore, Liberty's TV-Cages operate via an internet connection, so if the internet goes down, people are left without television. Fixing this issue will take some time for Liberty, giving Millicom more time to maintain dominance in the Pay-TV market.
Financials (In millions unless said otherwise)
As mentioned earlier, Millicom made the strategic decision to completely exit the African markets and focus solely on Latin America. This transition was a lengthy process that required careful consideration and incurred a significant amount of debt. Currently, Millicom's total debt stands at $6.8 billion, representing a 70% increase from the $3.7 billion recorded in 2017. This indicates an annual debt growth rate of 11%. One notable challenge for Millicom is the maturity dates of its debt, with 65% of the total debt maturing between 2023 and 2026.
However, it is likely that Millicom will address this issue by refinancing the debt through additional bond issuances. The local Latin American capital markets will certainly be willing to acquire those bonds. The maturity dates for the debt are as follows:
- $1.2 billion due in 2023
- $1.5 billion due in 2024
- $1.0 billion due in 2025
- $0.8 billion due in 2026
The company's debt issue is likely to continue exerting pressure on its revenues until a catalyst emerges. In my opinion, this catalyst will be the expansion of Millicom's TIGO Business segment, which, by the way, also operates as a cloud computing business offering Infrastructure-as-a-Service (IaaS) and Data-as-a-Service (DaaS) solutions. These markets show promising growth prospects, with an anticipated annual growth rate of around 13% until 2027 , surpassing the projected 4% growth in the Latin American market. Perhaps this is why Apollo expressed interest in acquiring Millicom for a value of $10 billion. However, the deal eventually fell through and was terminated.
Debt Evolution (Author's Calculation)
Turning to their operating results, it is evident that Millicom has experienced a steady growth in revenue, with an annual pace of 5.58% since 2016. Furthermore, their operating profit has also shown significant improvement, growing at an annual pace of 12.3%. This demonstrates Millicom's dedication to enhancing its operating margins. Importantly, this level of growth indicates that the company has the potential to manage its debt effectively by implementing cost-cutting measures, which are often more attainable than solely relying on revenue generation.
Revenue vs Operating profit (Author's Calculation)
Revenue | Operating Profit | |
2016 | 4,043 | 490 |
2017 | 4,076 | 645 |
2018 | 3,946 | 655 |
2019 | 4,336 | 575 |
2020 | 3,805 | 446 |
2021 | 4,261 | 619 |
2022 | 5,624 | 915 |
Finally, turning to their balance sheet, there isn't anything particularly noteworthy to highlight. Current assets have been on a decline, and current liabilities exceed current assets—a situation that has persisted since 2017. Nevertheless, in the Latin American market, the level of risk for Millicom is relatively low, indicating that this imbalance may not present immediate concerns or problems in the near term.
Balance Sheet (Author's Calculation)
Valuation
To value TIGO, I will incorporate the anticipated growth rate of 4.4% for the Latin American Telecom Market into Millicom's revenue. Considering Millicom's significant market presence, it can be considered synonymous with the market itself. The projected revenue can be estimated as follows:
Revenue | |
2023 | 5,624,000,000 |
2024 | 5,871,456,000 |
2025 | 6,129,800,064 |
2026 | 6,399,511,267 |
2027 | 6,681,089,763 |
2028 | 6,975,057,712 |
Next, let's consider the variable of net income before taxes. To calculate this, I will divide the profit before taxes from 2022 by the revenue, resulting in a proportion of 6.24%. Using this proportion, I can estimate the net income before taxes for each year by subtracting 6.24% from the projected revenue. The estimated values are as follows:
Revenue | Net Income | |
2023 | 5,624,000,000 | 350,937,600 |
2024 | 5,871,456,000 | 366,378,854 |
2025 | 6,129,800,064 | 382,499,524 |
2026 | 6,399,511,267 | 399,329,503 |
2027 | 6,681,089,763 | 416,900,001 |
2028 | 6,975,057,712 | 435,243,601 |
Lastly, I will project the depreciation and amortization (D&A) expenses as well as the interest expenses. To do this, I will analyze the historical variations and apply them to future projections. Based on historical data, the D&A expenses have shown an average variation of 7.4%, while the interest expenses have exhibited an average variation of 9.6%. By extrapolating these historical trends, I can estimate the projected D&A and interest expenses for the future.
D&A Projection | Interest Projection |
1,442,382,000.000 | 676,232,000.00 |
1,549,118,268.000 | 741,150,272.00 |
1,663,753,019.832 | 812,300,698.11 |
1,786,870,743.300 | 890,281,565.13 |
1,919,099,178.304 | 975,748,595.38 |
2,061,112,517.498 | 1,069,420,460.54 |
Revenue | Net Income | Plus D&A | Plus Interest | |
2023 | 5,624,000,000 | 350,937,600 | 1,793,319,600 | 2,469,551,600 |
2024 | 5,871,456,000 | 366,378,854 | 1,915,497,122 | 2,656,647,394 |
2025 | 6,129,800,064 | 382,499,524 | 2,046,252,544 | 2,858,553,242 |
2026 | 6,399,511,267 | 399,329,503 | 2,186,200,246 | 3,076,481,811 |
2027 | 6,681,089,763 | 416,900,001 | 2,335,999,179 | 3,311,747,775 |
2028 | 6,975,057,712 | 435,243,601 | 2,496,356,119 | 3,565,776,579 |
^Final EBITA^ |
In the table provided above, the column titled "Plus Interest" represents the crucial variable required to calculate EBITDA. Consequently, this final column also contains the calculated EBITDAs for each year considered in this projection. I then fill the assumptions table with the corresponding data from 2022, which serves as the basis for constructing the discounted cash flow ((DCF)) model. Both the assumptions table and the DCF model can be viewed below:
Assumptions (Author's Calculation)
DCF Part 1 (Author's Calculation)
DCF Part 2 (Author's Calculation)
As observed, my DCF analysis indicates a stock price of $53.56, representing a remarkable 229% increase from the current stock price of $16.26. The long-term growth rate employed in the analysis is an average derived from various projections, standing at an impressive 35%. While this growth rate may appear extraordinary and even unrealistic, it is crucial to consider the numerous catalysts present in Latin America. These include the low adoption of internet services, limited penetration of 5G technology, and the ongoing process of fiber adoption. Additionally, as emerging markets evolve, higher wages for individuals will drive price increases by Millicom, leading to revenue growth, among other factors.
When discussing valuations, it is worth noting an interesting aspect regarding Millicom's P/E ratio. Since 2019, its P/E ratio has been on a downtrend. At its peak, the ratio reached a high of 40, likely driven by optimistic growth prospects that were subsequently disrupted by the COVID-19 pandemic. This situation highlights the risks associated with emerging markets, as individuals were unable to afford payments, and governments mandated that telecom companies keep people connected to facilitate remote work and education. While these companies were expected to receive compensation, Latin American governments tend to operate slowly, and even to this day, the full amount may still be in the process of being disbursed. However, as of today, Millicom's P/E ratio remains depressed, presenting an attractive opportunity for investors to enter at a lower valuation.
Considering all these factors, I would recommend a "buy" rating for Millicom. In addition to its attractive stock price potential and low P/E ratio, there is also interest from hedge funds regarding potential takeovers, indicating the potential for activist-driven improvements within the company. When comparing my rating with that of other analysts, there aren't many differences. Both South African analysts and Wall Street analysts also have "buy" ratings on Millicom. However, SA Quant rates it as a "hold," which is influenced by the D+ grade on growth. Although I can't precisely determine the reasons behind that grade, I can defend my opinion that Millicom has several areas that could be addressed and improved. Furthermore, it offers a solid return even without significant improvements, given the overall growth of the Latin American telecoms market.
Risks to Thesis
The primary risks associated with this thesis are linked to emerging markets. These risks encompass issues such as corruption, the potential for increased taxes to compensate for inadequate tax infrastructure, the possibility of sudden shifts in a country's economic outlook, and the vulnerability of emerging markets to global crises compared to developed markets.
Additionally, another risk factor to consider is market sentiment, as it plays a crucial role in achieving the projected target. If the market sentiment towards Millicom is negative or if there is low interest in the stock, it may take time to reach the target price. However, it is worth noting that since reaching its lowest point in October, Millicom's stock has demonstrated significant growth, increasing by over 50%. Moreover, from 2020 to 2021, the stock experienced a surge of over 70%. These notable movements indicate the potential for substantial market shifts. In my opinion, with the anticipated future reduction in interest rates, the stock has the potential to reach the target determined by the DCF analysis.
Conclusion
Millicom holds a significant position in Latin America, offering more than just telecommunications services. The company also operates data centers and provides Infrastructure as a Service (IaaS) and Desktop as a Service (DaaS) solutions. Additionally, Millicom has successfully established its own digital wallet called TigoPay, which positions the company favorably in a region where the transition to cashless transactions is gaining momentum.
While Millicom's financials may indicate low margins, high debt, and sluggish revenue growth, it is important to note that their operating profit has been steadily increasing at a rate of 12%. This positive trend suggests a promising future for TIGO as it continues to solidify its operations in Latin America.
My valuation of the stock, using a DCF model, resulted in a stock price of $53.56, which would value the company at approximately $13.9 billion. Additionally, Millicom possesses the potential for a takeover, which could potentially yield immediate returns if it materializes.
For further details see:
Millicom International Cellular: There Is Plenty To Fix, But Potential Upside