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Morningstar | Millicom Reports Weak 4Q Results Due to Currencies, but Turnaround on Track; Shares Undervalued

Millicom reported weak fourth-quarter revenue as it was once again hit by currency weakness. However, we are pleased with the underlying progress the company is making and don’t anticipate any significant changes to our $86 per ADR fair value estimate. We continue to believe the company has a narrow moat, and the shares are undervalued. We model Millicom as if it consolidated its operations in Guatemala and Honduras and removed minority interests. On this basis, the firm’s revenue declined 2.9% in the fourth quarter and 0.2% for the full year versus our full-year projection of growth of 2.5%. Most currencies took a hit in the quarter, led by the Colombian peso down 6.1%. The company’s revenue was also hurt from the implementation of IFRS 15, though this had minimal impact on EBITDA.

While competitive intensity continued during the fourth quarter in Paraguay, which led to a 6.6% decline in its wireless subscriber base year over year to 3 million, customers were pretty flat sequentially. Meanwhile, it grew its cable TV base by 10.3% to 406,000. El Salvador continues to struggle, with revenue falling 10.6%, but even here management claimed there are signs of improvement.

However, everywhere else the underlying businesses are doing well. In Colombia, Millicom's largest market, organic revenue grew 2.4% in the quarter and 3.7% for the year. Importantly, it grew its 4G wireless base 33.4% year over year. As 4G customers tend to have higher average revenue per user and lower churn, this augurs well for 2019. Overall, its wireless base in Colombia increased 5.6% to 8.3 million. We were very pleased with this gain in the quarter as Millicom had seen wireless subscriber losses in the country in the previous two quarters.

As expected, Millicom’s EBITDA margin pulled back in 2018 primarily due to the problems in El Salvador. It came in at 36.2%, similar to our 36.3% projection. We expect revenue growth and cost controls should enable EBITDA margin expansion going forward.

Bolivia generated the fastest revenue growth at 4.9% overall led by a huge jump of 68.7% in cable TV subscribers to 389,000. Overall, the firm grew its wireless subscriber base 1.6% to 32.4 million, including 10.9% in mobile data customers to 16.7 million and 46.1% in 4G subscribers to 10.1 million. Importantly, only about 30% of its wireless base use 4G, so there is still lots of growth available from the continued transition to 4G. On the cable TV side, Millicom increased its penetration by 25.1% to 10.6 million premises and its cable TV relationships by 33.2% to 3.1 million. Thus, there are also lots of growth opportunities on the cable TV side, which has been growing faster than wireless. The cable TV growth will be enhanced in 2019 due to the recent acquisition of Cable Onda in Panama.