LILA - Liberty Global Latin America tracker

[spark411]

I thought the overall conference call was solid.  Here are some positives and negatives I got out of the call.

 

Positive:

1.  Mgmt did a good job of allaying fears about Puerto Rico and other Hurricane impacted regions.  They mentioned that households will be reduced in Puerto Rico b/c of Hurricane and that they lost some customers BUT they also said that power is restored to many and Lilak is now producing positive OCF.  They also looked at the rebuilding as an oppty to gain market share and thus hope to at minimum be back to where they were before the Hurricane.  I think a lot of institutional money is holding back because of the impact of hurricanes.  I hope the call alleviated their concerns and they are open to buying Lilak again.

2.  M&A pipeline is solide.  Discussed how they can do acquisitions creatively.  For example, the recent deal is Costa Rica was a small equity check because they convinced the bank to finance most of the deal.    This was a BIG positive for me.  Positive b/c they have the expertise to structure deals that's win/win for them and the seller and do it with relatively little cash.    Also, just like a seller will be excited I think local banks/credit market will be excited to work with Lilak.

3.  The $1.4B OCF guidance does not include the potential $100M refund from the insurance claim.  This is upside.

4.  2018 OCF is weighed down b/c of hurricane impact.  I think the result is that 2019 will be an abnormally high growth rate.

5.  They will not use stock as a currency for M&A at this time.  They may use stock in the future.  My takeaway is that the stock price is too low right now.

 

Negative:

1.  They did not buy back shares in Q4.  They did not hint that they will buy back shares.  I thought this was kind of disappointing.  I got the sense that they prefer using cash flow to do acquisition than buy back shares.

 

Neutral:

The capex spending is 21% and that number is inclusive of the capex for the hurricane.  I don't know if this is a positive or negative. 

 

These are my takeaways.  I have a big position and thus I am biased.  Please take my comments with a grain of salt.

[Gordon Gecko]

@spark411 What do you make of guidance?

 

$1.4 isn't split out, so it's tough to back into anything. Seemed light given the price increases in JAM and T&T though, no? They're implementing a low-mid single digit across some of their larger territories and looking to exit the year w/ ~$170mm run rate OIBDA for PR.  $1.4 probably gets you to around 7.5x proportional OIBDA including fully synergized Teletica (netting minority payments)?

 

I think that's probably an OK multiple on what would (likely? Hopefully?) be a closer-to-trough earnings period in CWC. I don't think I could supersize a position here though. Any addtl thoughts?

[spark411]

My thoughts on OCF are:

 

A.  We have a new company with a first time CEO.  The last thing they want to do is miss the 1st guidance they offer.  Guidance is "Greater than" $1.4B.  I think the guidance is conservative and they are giving a hint.

 

B.  As mentioned in the last post, there is an extra $100M cash from the insurance claims not in the guidance.

 

C.  I think the wild card is the hurricane affected regions.  How fast they ramp up OCF from those regions is out of Lilak's control i.e. power to the affected areas.  Because of this, I think they could not offer a solid guidance.

 

All in all, I think there is upside to the guidance and I hope they raise guidance throughout the year. 

[flesh]

2019 Will be a great year.

[maybe4less]

My thoughts on OCF are:

 

A.  We have a new company with a first time CEO.  The last thing they want to do is miss the 1st guidance they offer.  Guidance is "Greater than" $1.4B.  I think the guidance is conservative and they are giving a hint.

 

I think this is right. Comments from Fries over the last year or so have led me to believe they have made a conscious decision to be much more conservative on guidance.

[Shooter MacGavin]

why'd the stock jump ~6% today?

[cameronfen]

why'd the stock jump ~6% today?

 

My thought was that people are expecting earnings to be good after the hurricane basically wiped out 2017, and so are playing the earnings bounce, but I have no idea. 

[spark411]

http://www.lla.com/pdf/press-release/LLA-Earnings-Release-Q1-2018.pdf

 

Anyone have thoughts?

[Spekulatius]

http://www.lla.com/pdf/press-release/LLA-Earnings-Release-Q1-2018.pdf

 

Anyone have thoughts?

 

The results just suck - OCF down, FCF negative, leverage worrisome. I didn’t expect good results and sold my starter position today and swapped the proceeds into CHTR. Much better business, similar valuation, better financed and much easier to understand.

 

I do think that LILA will show better metrics once PR is recovered, but it won’t be enough of a difference to turn this around.

[jgyetzer]

I agree that the consolidated numbers are a bummer, but if you look at each segment it looks like they are growing subscribers and revenues while investing heavily in C&W and VTR.  PR, while still negative compared to last year has dramatically improved since Q4 2017 which seems to suggest an inflection.  Short term there may be some pain, but then again it’s not priced with high expectations...

[cameronfen]

http://www.lla.com/pdf/press-release/LLA-Earnings-Release-Q1-2018.pdf

 

Anyone have thoughts?

 

The results just suck - OCF down, FCF negative, leverage worrisome. I didn’t expect good results and sold my starter position today and swapped the proceeds into CHTR. Much better business, similar valuation, better financed and much easier to understand.

 

I do think that LILA will show better metrics once PR is recovered, but it won’t be enough of a difference to turn this around.

 

I didn't think it was all that bad.  Not much management can do to stop customers from leaving in Puerto Rico.  The area sucks now.  People have higher priorities than buying cable.  VTR and C & W grew 1% QoQ which is not great but not bad.  1.2 billion in ocf suggests a slightly higher leverage ratio than before, but not different than Charters at 5x.  Loss of mobile subs is worrying as mobile and cable are synergistic and you dont get the benfits if you cant scale the mobile.  I think at some point PR turns around and that adds a significant boost to ocf and its currently trading below Charters 9x ebitda before PR. 

[EricSchleien]

You think it’s going to be a 0?

 

http://www.lla.com/pdf/press-release/LLA-Earnings-Release-Q1-2018.pdf

 

Anyone have thoughts?

 

The results just suck - OCF down, FCF negative, leverage worrisome. I didn’t expect good results and sold my starter position today and swapped the proceeds into CHTR. Much better business, similar valuation, better financed and much easier to understand.

 

I do think that LILA will show better metrics once PR is recovered, but it won’t be enough of a difference to turn this around.

[Spekulatius]

You think it’s going to be a 0?

 

http://www.lla.com/pdf/press-release/LLA-Earnings-Release-Q1-2018.pdf

 

Anyone have thoughts?

 

The results just suck - OCF down, FCF negative, leverage worrisome. I didn’t expect good results and sold my starter position today and swapped the proceeds into CHTR. Much better business, similar valuation, better financed and much easier to understand.

 

I do think that LILA will show better metrics once PR is recovered, but it won’t be enough of a difference to turn this around.

 

No, it’s not a zero, just not a good investment. The best part of thr business is what used to be in the original LILA, thr chilean cable assets, the C&W assets are just mediocre.

 

CHTR is just a better business, and valuation is almost thr same now. I think CHTR leverage is 4.5x, same than LILA net leverage, by CHTR is in thr US and has a more stable business, which means that their cost of debt should be less. LILA has currency risk and interest rates in local currencies are much higher than in the US, or they can take on debt USD and risk currency losses, unless they hedge them out, which also costs money.

[cameronfen]

You think it’s going to be a 0?

 

http://www.lla.com/pdf/press-release/LLA-Earnings-Release-Q1-2018.pdf

 

Anyone have thoughts?

 

The results just suck - OCF down, FCF negative, leverage worrisome. I didn’t expect good results and sold my starter position today and swapped the proceeds into CHTR. Much better business, similar valuation, better financed and much easier to understand.

 

I do think that LILA will show better metrics once PR is recovered, but it won’t be enough of a difference to turn this around.

 

No, it’s not a zero, just not a good investment. The best part of thr business is what used to be in the original LILA, thr chilean cable assets, the C&W assets are just mediocre.

 

CHTR is just a better business, and valuation is almost thr same now. I think CHTR leverage is 4.5x, same than LILA net leverage, by CHTR is in thr US and has a more stable business, which means that their cost of debt should be less. LILA has currency risk and interest rates in local currencies are much higher than in the US, or they can take on debt USD and risk currency losses, unless they hedge them out, which also costs money.

 

Maybe there are holes in my argument, but I disagree.  VTR is number two in cable and number 7 or 8 in mobile in Chile.  Telefonica is number 1 in both.  With the convergence of mobile and cable this will cause problems in the future for players that arent telefonica. Especially with wireless broadband and small cells.  Why do you think VTR is trying to create a mobile business?  Vtr is probably best positioned other than telefonica, but American Movil is an 50 billion dollar company in chile and so is telefonica.  Basically all of Latin America is split between these two giants and AMX especially has both massive broadband (75 million RGUs) and massive mobile (300 million subs) operations all over mexico to argentina.  The only place where you dont really have to compete with either juggernaut very much is the caribbean, in part due to the shitty geography maybe (islands).  The main competitor here is digitel, which sort of like telephonica (but worse), is highly leveraged and you may be able to buy assets for cheap at the next downturn. Maybe you can complain about price and you certainly can over pay for quality assets, but this was probably the best stategic  decision for a  company in an oligopoly position. 

[spark411]

cameronfen-Great points.  I never saw the business from that strategic perspective.

 

I agree overall the numbers look good.  The decrease was mainly due to Puerto Rico. I thought the big news is that PR is almost 100% back online.  Thus the numbers should improve quickly.  Stock was whacked about 20% because the market seemed to think PR will never comp back.  I hope the combination of good OCF in areas other than PR and PR getting back on-line will bring the stock back up.

 

I love Vodafone looking to buy Liberty Global assets to do quadplay in Europe.  It seems that Malone is trying to do Quadplay from day one in Latin America.  Hope this means good asset appreciation long term.

[cameronfen]

cameronfen-Great points.  I never saw the business from that strategic perspective.

 

I agree overall the numbers look good.  The decrease was mainly due to Puerto Rico. I thought the big news is that PR is almost 100% back online.  Thus the numbers should improve quickly.  Stock was whacked about 20% because the market seemed to think PR will never comp back.  I hope the combination of good OCF in areas other than PR and PR getting back on-line will bring the stock back up.

 

I love Vodafone looking to buy Liberty Global assets to do quadplay in Europe.  It seems that Malone is trying to do Quadplay from day one in Latin America.  Hope this means good asset appreciation long term.

Quadplay is an important synergy in terms of customer stickiness, however the main thing (in my mind) is with 5G all telecos will need cable infrastructure to small cells and, maybe less significantly, with wireless broadband, all cable companies will need macro towers in case of intermittent connection with the small cells (kind of like how your phone switches to 3G when 4G is not available). 

[rogermunibond]

Does anyone really want quadplay anymore in the US?  Or for that matter Europe or LatAM?

 

Lots of households have broadband and cellular.  That's it.

 

 

[cameronfen]

Does anyone really want quadplay anymore in the US?  Or for that matter Europe or LatAM?

 

Lots of households have broadband and cellular.  That's it.

Right but even broadband and cellular is more sticky than just broadband (and getting cellular somewhere else). 

[afm408]

You think it’s going to be a 0?

 

http://www.lla.com/pdf/press-release/LLA-Earnings-Release-Q1-2018.pdf

 

Anyone have thoughts?

 

The results just suck - OCF down, FCF negative, leverage worrisome. I didn’t expect good results and sold my starter position today and swapped the proceeds into CHTR. Much better business, similar valuation, better financed and much easier to understand.

 

I do think that LILA will show better metrics once PR is recovered, but it won’t be enough of a difference to turn this around.

 

No, it’s not a zero, just not a good investment. The best part of thr business is what used to be in the original LILA, thr chilean cable assets, the C&W assets are just mediocre.

 

CHTR is just a better business, and valuation is almost thr same now. I think CHTR leverage is 4.5x, same than LILA net leverage, by CHTR is in thr US and has a more stable business, which means that their cost of debt should be less. LILA has currency risk and interest rates in local currencies are much higher than in the US, or they can take on debt USD and risk currency losses, unless they hedge them out, which also costs money.

 

Can you run me through the math on how Charter and LILAK are the same valuation?  Couple points that I think people are missing on value.  First, LILAK doesn't own 100% of every business, including their debt.  It only owns 80% of CWC (although 95% of its debt) and it only owns 60% of PR.  Second, PR is bankruptcy remote, so it could go to zero and not effect the other subs.  So here's the math I see:

 

1) Assume PR is a zero (I'm willing to bet that it's not)

2) Annualize the recent Q in OCF for CWC and VTR.  This is obviously a rough way of doing it, and I'd bet they actually see some sequential growth, but for illustrations sake let's do it.  So that gives you $918 of OCF for CWC and $420 of OCF for VTR.  That also means $733 of proportional OCF for CWC, since they only own 80% (they own 100% of VTR), so in total that's $1,153m of proportional OCF in CWC + VTR.

3) With them owning 100% of debt on VTR, and 95% on CWC, it works out to $4,900 of net debt.

4) 171m shares outstanding at $21.2, gets a market cap of $3,625.

5) That means proportional TEV of $8525 and proportional OCF of 1,153, means TEV / EBITDA of 7.4x, assuming PR goes completely bankrupt.

 

Run the same exercise on Charter, annualizing the last Q, and you'll get a TEV / EBITDA of 8.75x.

 

Now, there are arguments on multiple for both sides (CHTR is 100% cable and is not a cash tax payer on the one hand, but LILAK has lower penetration, high value subsea business, good inorganic growth oppty and this Q shows capex intensity ex hurricane to be about the same as CHTR on the other hand) but that feels like a big difference, again assuming PR is worthless. 

 

 

[HalfMeasure]

You think it’s going to be a 0?

 

http://www.lla.com/pdf/press-release/LLA-Earnings-Release-Q1-2018.pdf

 

Anyone have thoughts?

 

The results just suck - OCF down, FCF negative, leverage worrisome. I didn’t expect good results and sold my starter position today and swapped the proceeds into CHTR. Much better business, similar valuation, better financed and much easier to understand.

 

I do think that LILA will show better metrics once PR is recovered, but it won’t be enough of a difference to turn this around.

 

No, it’s not a zero, just not a good investment. The best part of thr business is what used to be in the original LILA, thr chilean cable assets, the C&W assets are just mediocre.

 

CHTR is just a better business, and valuation is almost thr same now. I think CHTR leverage is 4.5x, same than LILA net leverage, by CHTR is in thr US and has a more stable business, which means that their cost of debt should be less. LILA has currency risk and interest rates in local currencies are much higher than in the US, or they can take on debt USD and risk currency losses, unless they hedge them out, which also costs money.

 

Can you run me through the math on how Charter and LILAK are the same valuation?  Couple points that I think people are missing on value.  First, LILAK doesn't own 100% of every business, including their debt.  It only owns 80% of CWC (although 95% of its debt) and it only owns 60% of PR.  Second, PR is bankruptcy remote, so it could go to zero and not effect the other subs.  So here's the math I see:

 

1) Assume PR is a zero (I'm willing to bet that it's not)

2) Annualize the recent Q in OCF for CWC and VTR.  This is obviously a rough way of doing it, and I'd bet they actually see some sequential growth, but for illustrations sake let's do it.  So that gives you $918 of OCF for CWC and $420 of OCF for VTR.  That also means $733 of proportional OCF for CWC, since they only own 80% (they own 100% of VTR), so in total that's $1,153m of proportional OCF in CWC + VTR.

3) With them owning 100% of debt on VTR, and 95% on CWC, it works out to $4,900 of net debt.

4) 171m shares outstanding at $21.2, gets a market cap of $3,625.

5) That means proportional TEV of $8525 and proportional OCF of 1,153, means TEV / EBITDA of 7.4x, assuming PR goes completely bankrupt.

 

Run the same exercise on Charter, annualizing the last Q, and you'll get a TEV / EBITDA of 8.75x.

 

Now, there are arguments on multiple for both sides (CHTR is 100% cable and is not a cash tax payer on the one hand, but LILAK has lower penetration, high value subsea business, good inorganic growth oppty and this Q shows capex intensity ex hurricane to be about the same as CHTR on the other hand) but that feels like a big difference, again assuming PR is worthless.

 

afm, I think you're looking at it the right way.

[Spekulatius]

You think it’s going to be a 0?

 

http://www.lla.com/pdf/press-release/LLA-Earnings-Release-Q1-2018.pdf

 

Anyone have thoughts?

 

I haven’t thought about simply removing the PR cash flow and debt from the equation. my guesstimate was from the recent 10-q $6.2B in debt -$500M in cash = $5.7B in net debt. Puerto Rico had close to $1B in debt ,so if you subtract 60% of this you get $600M in LILA share PR debt or a debt sans PR of $5.1B which seems close enough to your estimate.

 

I still think that LILA deserves only a lower multiple due to partly lower quality assets (prepaid wireless)higher cost of capital and just equal organic growth compared to CHTR (if that) and cash leakage ($300M for LILA if my notes are correct). I bought a starter early last year and it has been a steady drip of bad news with PR in fall being the culmination. LRBDY is almost the same, but not quite as bad. There is no reward for complexity in investing and everything being equal, simpler is better.

 

The results just suck - OCF down, FCF negative, leverage worrisome. I didn’t expect good results and sold my starter position today and swapped the proceeds into CHTR. Much better business, similar valuation, better financed and much easier to understand.

 

I do think that LILA will show better metrics once PR is recovered, but it won’t be enough of a difference to turn this around.

 

No, it’s not a zero, just not a good investment. The best part of thr business is what used to be in the original LILA, thr chilean cable assets, the C&W assets are just mediocre.

 

CHTR is just a better business, and valuation is almost thr same now. I think CHTR leverage is 4.5x, same than LILA net leverage, by CHTR is in thr US and has a more stable business, which means that their cost of debt should be less. LILA has currency risk and interest rates in local currencies are much higher than in the US, or they can take on debt USD and risk currency losses, unless they hedge them out, which also costs money.

 

Can you run me through the math on how Charter and LILAK are the same valuation?  Couple points that I think people are missing on value.  First, LILAK doesn't own 100% of every business, including their debt.  It only owns 80% of CWC (although 95% of its debt) and it only owns 60% of PR.  Second, PR is bankruptcy remote, so it could go to zero and not effect the other subs.  So here's the math I see:

 

1) Assume PR is a zero (I'm willing to bet that it's not)

2) Annualize the recent Q in OCF for CWC and VTR.  This is obviously a rough way of doing it, and I'd bet they actually see some sequential growth, but for illustrations sake let's do it.  So that gives you $918 of OCF for CWC and $420 of OCF for VTR.  That also means $733 of proportional OCF for CWC, since they only own 80% (they own 100% of VTR), so in total that's $1,153m of proportional OCF in CWC + VTR.

3) With them owning 100% of debt on VTR, and 95% on CWC, it works out to $4,900 of net debt.

4) 171m shares outstanding at $21.2, gets a market cap of $3,625.

5) That means proportional TEV of $8525 and proportional OCF of 1,153, means TEV / EBITDA of 7.4x, assuming PR goes completely bankrupt.

 

Run the same exercise on Charter, annualizing the last Q, and you'll get a TEV / EBITDA of 8.75x.

 

Now, there are arguments on multiple for both sides (CHTR is 100% cable and is not a cash tax payer on the one hand, but LILAK has lower penetration, high value subsea business, good inorganic growth oppty and this Q shows capex intensity ex hurricane to be about the same as CHTR on the other hand) but that feels like a big difference, again assuming PR is worthless.

[rogermunibond]

http://variety.com/2018/biz/news/atts-directv-latin-america-ipo-spinoff-vrio-1202720505/

 

Does the Vrio - T spinoff of DTV LatAm assets bring a new player into the LatAm rollup scenario?  Or since it's sat TV - does no one want it?

 

 

[cameronfen]

http://variety.com/2018/biz/news/atts-directv-latin-america-ipo-spinoff-vrio-1202720505/

 

Does the Vrio - T spinoff of DTV LatAm assets bring a new player into the LatAm rollup scenario?  Or since it's sat TV - does no one want it?

 

I think spin was cancelled. 

[spark411]

Many think that the C&W acquisition at 12x EBITDA was high. In the recent quarterly earnings call, Lilak CEO says that they are utilizing less than 10% of the network capacity of the sub sea network from C&W acquisition. The 12x EBITDA does not factor in the upside of C&W's greatest asset i.e. sub sea network. Put another way, I think higher utilization of the sub sea network is a meaningful tailwind for Lilak that is being undervalues. Lilak CEO said sub sea network is being undervalued by the analyst community.

 

Would be interested to hear if anyone has thoughts on my line of thinking.

[cameronfen]

Many think that the C&W acquisition at 12x EBITDA was high. In the recent quarterly earnings call, Lilak CEO says that they are utilizing less than 10% of the network capacity of the sub sea network from C&W acquisition. The 12x EBITDA does not factor in the upside of C&W's greatest asset i.e. sub sea network. Put another way, I think higher utilization of the sub sea network is a meaningful tailwind for Lilak that is being undervalues. Lilak CEO said sub sea network is being undervalued by the analyst community.

 

Would be interested to hear if anyone has thoughts on my line of thinking.

 

I think (and this is just someone without industry experience talking) the main advantage of the sub sea network is the moat.  In Central and Latin America the only place where America Movil have not really a significant presence in cable fixed line presence is the Caribbeans.  This is on top of there leading/monopoly position in mobile telecoms.    Probably the main reason is the necessity for the fixed line network.  I remember reading Cable Cowboys and remember one line where the biggest fear of the cable players was the telecoms getting into the business because of there massive resources.  In Latin America, Movil is like AT&T on steroids and Comcast combined.  IMO it is a huge benefit to not have to compete with them (at least on the broadband side).