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Morningstar | Millicom Reported Mixed 3Q Results With Lower Revenue Growth but Solid Margins; Shares Undervalued

Millicom reported mixed third-quarter results with revenue a bit light but strong EBITDA margins. We believe these issues basically offset each other and are maintaining our $86 per ADR fair value estimate and narrow moat rating. We believe the shares are undervalued. Reported revenue only grew 0.3% year over year in the quarter but is still up 1.7% through nine months. However, this still trails our full-year projection of 3.3%, but importantly on an organic basis its service revenue grew 4.2% during the quarter. We believe this is the more important metric long term.

The firm’s cable TV business performed particularly well with revenue growing 12.5%. This segment now accounts for 25% of Latin American service revenue, which will increase to over 30% next year with the pending acquisition of Cable Onda. Thus, the faster growing cable business is becoming increasingly important. Latam wireless revenue also grew 1%, but its subscriber base declined slightly due to another bad quarter in El Salvador, where its customer base fell 20.6% to 2.5 million. While we are concerned about the turnaround in El Salvador, we are pleased with most results elsewhere. Millicom is focusing on moving customers to 4G service and postpaid plans. Both of these transitions increase average revenue per user, or ARPU, as customers tend to increase data usage. The firm is on schedule to move 3 million customers to 4G this year, but this still leaves about 70% of its subscribers on 3G service. Thus, there is still lots of opportunity for revenue growth from increasing ARPU.

Millicom continues to also focus on cost-cutting and pushed its EBITDA margin up to 37.7%, nicely ahead of our full-year projection of 36%. It also brings the nine-month EBITDA margin up to 37.1%, though the fourth quarter often has lower margins, which will likely pull the full-year EBITDA margin down a bit.

The African businesses revenue also declined slightly, but it is becoming smaller and now accounts for less than 9% of firmwide revenue. We expect management to sell the rest of this business as opportunities arise.

The currencies in the countries Millicom operates in have been relatively stable over the past year or so, particularly relative to the Brazilian real and the Argentine peso. However, toward the end of the quarter some currencies did see some pressure. That said, we’ve been particularly pleased with the relative stability of the Colombian peso, which historically has moved more in relationship with the real. However, it appears to be benefiting more from stronger oil prices as Brazil’s oil giant Petrobras remains mired in the “Lava Jato” or car wash scandal.