EUR 850.00 For Business Accounts Only

Morningstar | Millicom Reports Mixed First-Quarter Results; Maintaining $86 FVE, Shares Undervalued

Millicom reported mixed first-quarter results with revenue light and EBITDA margin strong. The firm reported revenue growth of 5.1% year over year primarily driven by the acquisition of Cable Onda in Panama. Revenue growth elsewhere was mostly offset by currency depreciation that occurred last year. Importantly, organic revenue growth was 3.7%, in line with our estimate of 3.5%. Our revenue projection of 15.2% assumes the proposed acquisitions of Telefonica’s wireless operations in Panama, Nicaragua, and Costa Rica close in early August, providing revenue for 40% of the year. On the conference call management stated the purchases are independent, with one likely to close in the second quarter, one in the third quarter, and the last one in the fourth quarter. Thus, 2019 acquisition revenue may be less than we’ve thought. However, we don’t anticipate any significant changes to our $86 per ADR fair value estimate or narrow moat rating as its EBITDA margin was ahead of our estimate. We believe the shares are undervalued.

The firm’s operation in Colombia continues to improve with wireless subscriber growth of 10.1% year over year to 9 million, while its cable base grew 2.4% to 1.7 million. This led to organic revenue growth of 3.3% but was offset by a 9.4% depreciation of the Colombian peso, most of which occurred during last year’s fourth quarter. We believe this subscriber growth demonstrates that the country has returned to rational competition.

Bolivia and Guatemala continued to drive very fast cable subscriber growth of 58.6% to 425,000 and 29.6% to 498,000, respectively. Cable subscriber growth was generated in all Latin American countries except El Salvador. We believe cable will be the primary driver of growth going forward as Millicom continues to expand its footprint by passing roughly 1 million additional premises for each of the next five years and then cross-sells the service to its much more extensive wireless base.

In total, excluding the Cable Onda acquisition, the firm’s cable base grew 17% from the year-ago period, and including Cable Onda, it totals 3.2 million relationships and 6.3 million revenue generating units. We also expect the firm to generate some revenue growth from the wireless side, particularly from upgrading subscribers to 4G, where their data usage increases, and drives higher average revenue per user. We also believe Millicom will benefit from cross-selling cable and wireless services. Beyond direct revenue growth of two revenue streams, customers that take both services have lower churn rates.

While El Salvador continues to struggle, with its mobile base declining 7.2% and its cable base dropping 8.6%, these are less than last year’s numbers and in line with our expectation. Its organic revenue actually declined less than 1% but fell 6.9% including negative currency movements. Millicom became more aggressive in the quarter with promotions to maintain market share, which caused a greater decline in EBITDA falling 13.9%.

Outside of El Salvador, Millicom is doing a good job of controlling costs, which is allowing its EBITDA margin to grow faster than revenue. In Latin America, its organic EBITDA grew 4.5% year over year. In total the firm’s EBITDA margin was 40.3%, but this included $42 million of EBITDA due to accounting changes with the adoption of IFRS 16. However, excluding this change, its EBITDA margin was 37.5%, which is still ahead of our projection of 36.7%. Thus, we believe any shortfall in our revenue estimate will be offset by better EBITDA margin results.