2023-05-09 17:35:34 ET
Summary
- TIGO reported a poor 1Q23, with a 6% drop in EBITDA due to slowing revenue growth and rising expenses.
- Non-recurring costs associated with an organizational restructuring are expected to generate savings of $100 million per year by 2024.
- TIGO is seeing an improvement in the number of mobile postpaid customers, which has a long-term impact on the company's business.
- The home pass segment continues to face challenges due to competition and macroeconomic conditions, but TIGO's price increases and focus on broadband customers provide higher profitability.
Overview
Millicom International Cellular ( TIGO ) is a provider of fixed and mobile telecommunications services in Latin America. TIGO's reported 1Q23 results were not great from a headline basis, as the company encountered FX pressure and higher cost pressure, both of which contributed to lower EBITDA. Revenues increased by 2% after adjusting for FX, but EBITDA fell by 6%. However, it is important to note that a sizeable portion of the cost increase was one-time and related to the company's ongoing effort to restructure its internal operations. One could also see these as cost pulled forward that should not occur again once things normalize in the coming quarter, giving EBITDA an easy sequential comp and benefit from cost savings for the full year. All in all, I am recommending a buy rating on the stick, but a small position given the volatile FX environment. I expect TIGO to capture more postpaid and broadband customers, which will improve underlying profitability.
1Q23 earnings
TIGO reported a poor 1Q23, with a 6% drop in EBITDA due to slowing revenue growth and rising expenses. Competition and price increases contributed to a stagnant subscriber base, which in turn contributed to slow revenue growth. The non-recurring costs associated with an organizational restructuring were a major contributor to a low EBITDA, but they are expected to generate savings of $100 million per year by 2024.
Postpaid is better
Just by looking at the headline figures, the mobile customer base was pretty much the same as 4Q22, with a modest decline of 11,000 subscribers. The decline was mainly contributed by Guatemala, Colombia, Paraguay and Nicaragua, which was offset by growth in Panama, El Salvador, and Bolivia. I think what might be overlooked is the improvement of the number of mobile postpaid customers from 6.38 million to 6.55 million, and increase of about 170k which is mostly ported over from prepaid subscribers, as such this was not reflected in the headline. This transition has long-term impacts on TIGO's business as postpaid generally has better ARPU, retention rates, and customer lifetime value. This also means that while TIGO is not gaining new subscribers, the underlying business is structurally improving. Importantly, the current base of post subscribers only represents about 15% of the total base, which means there is still a huge pool of subscribers to be converted. A key reason why the improved Mobile ARPU is not reflected is due to FX movements. Once FX environment normalizes, we should see ARPU improvement reflecting in the numbers, which I believe will contribute to growing earnings.
Home pass continue to be challenging
In contrast to Mobile where TIGO continues to see traction in conversion of pre to postpaid subscribers, the number of homes passed slowed. At the end of 1Q23, TIGO had passed 13 million homes, an increase of 96k quarter-over-quarter but a significant slowdown from the 223k average quarterly growth seen in the prior three quarters. The number of customer relationships was also low, coming in at 4.8 million and dropping by 35k month-on-month. I believe this weak performance and decline has confirmed that competition is strong, and that macroeconomic environments is really challenging. However, what was encouraging to know was that TIGO has increased prices and has maintained installation fees instead of reducing pricing to capture share. In my opinion, the fact that the number of subscribers grew in spite of the price increase tells me about the competitive position TIGO has in its markets. Taking another view, the increase in prices provides TIGO the additional fire power to reinvest into the business (e.g. more CAPEX to drive more homes passed, etc). ARPU, on a reported USD basis, declined 6% vs last year mainly due to a weaker Colombian peso. In fact, ARPU in local currency only declined 1% due to the intense competition and the shift to broadband-only customers, which have a lower ARPU. However, the important thing here is that broadband customers have higher margins as costs and capex are lower, which provides higher profitability (which is what matters).
Leverage
TIGO's leverage ratio increased slightly to 3.2x vs previous quarter of 3x due to the lower EBITDA and some increase in debt. I do not think the leverage ratio is in any danger zones at the moment, as the reduced EBITDA is due to non-recurring costs that will taper off. EBITDA is also expected to increase due to the cost savings, bringing down the leverage ratio. The fact that management is sticking to the previously announced leverage target of 2.5x by 2025 is a positive sign that they intend to allocate capital prudently using FCF. As the leverage ratio comes down, and EBTIDA goes up, the increase in cash flow could potentially be returned to shareholders via buybacks of dividends.
Conclusion
While TIGO's 1Q23 earnings were impacted by FX pressure and higher costs, much of these costs were related to the company's internal restructuring, which is expected to generate significant savings in the future. The transition to postpaid mobile customers is a positive sign for TIGO, as postpaid customers generally have better ARPU and customer lifetime value. The home pass segment continues to face challenges due to competition and macroeconomic conditions, but TIGO's price increases and focus on broadband customers provide higher profitability. TIGO's leverage ratio is slightly higher than the previous quarter, but management's commitment to reducing it by 2025 is a positive sign. Overall, I recommend a buy rating on TIGO, but with a small position given the volatile FX environment. I expect TIGO to capture more postpaid and broadband customers, leading to improved profitability in the future.
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Millicom International Cellular: Underlying Business Seems To Be Improving