EUR 850.00 For Business Accounts Only

Morningstar | America Movil Posts Strong Fourth-Quarter Customer Growth; Pricing Power in Mexico Constrained

Narrow-moat America Movil’s fourth-quarter financial results were roughly in line with our expectations, with reported revenue declining 1% year over year. Excluding currency movements, revenue would have increased 3%. Customer growth was particularly strong in several areas, including the Mexican wireless and fixed-line businesses and the Brazilian wireless segment. On the downside, management seems content with average monthly revenue per Mexican wireless customer in the MXN 150 range. We have been expecting significant growth in this figure over the next few years as competitive intensity in the market eases. We aren’t overly concerned with this development yet, and we don’t plan to change our $18 fair value estimate, but we believe regulatory and political concerns will influence pricing. Regulatory pressure remains a key uncertainty for investors and major consideration behind our negative moat trend rating.

Revenue growth in Mexico slowed slightly relative to the past couple quarters but remained solid at 5%. Movil added 744,000 net new wireless customers during the quarter, its best performance in four years, but the prepaid business drove this improvement. Average revenue per wireless customer inched only slightly above the prior quarter’s mark, the weakest growth in over a year. The increase in prepaid accounts likely put some pressure on this metric during the quarter, which management expects to continue going forward. Conversely, we’ve been expecting Movil to post minimal customer growth over the next several years, but with its base shifting more toward higher-end postpaid accounts. At this point, though, Movil is battling with regulators over the structural separation of Telmex into wholesale and retail units while trying to win approval to enter the Mexican television market. Until these issues are resolved, we doubt Movil will move wireless pricing around much, which likely will encourage lower-end customers to use its industry leading network.

In the Mexican fixed-line business, Movil added 248,000 Internet access customers during the quarter, nearly double the number it had added in the prior seven quarters combined. The reason behind the acceleration in growth isn’t clear to us. Management claims the firm has built fiber out to 6 million homes in the country, or about one sixth of the market, but we doubt this position materially affected the rate of growth in this quarter versus the recent past. Despite the increase in customer growth, Mexican fixed-line service revenue continues to decline on pressure in the phone business, both on long-distance and interconnection rates.

In Brazil, Movil added 1.2 million postpaid wireless customers, its best performance on record and an increase of 6% during the quarter. Average revenue per customer continues to grow at a double-digit pace, but weakness in the Brazilian real has pressured revenue in both Mexican peso and U.S. dollar terms. In local currency, Brazilian revenue increased only 1% year over year, as the fixed-line business continues to struggle against declining long-distance phone revenue and weakness in the satellite television business. In Mexican peso terms, we calculate that Brazilian revenue declined about 10% year over year during the quarter. On the positive side, the Brazilian EBITDA margin continues to climb nicely higher, expanding 0.6 percentage points year over year, excluding the benefit from the resolution of tax disputes this quarter.

Movil generated about MXN 74 billion (roughly $3.7 billion) of free cash flow during 2018, up about 10% versus the prior year. The majority of free cash flow was again directed toward debt repayment. The firm ended 2018 with MXN 568 billion of net debt, down about MXN 46 billion during the year, pulling net leverage down to 1.9 times EBITDA from 2.0 times. Management expects to continue directing cash flow to debt repayment in 2019 as it works toward its 1.5 times leverage target.