TIGO - Millicom

[WayWardCloud]

Millicom is a cable and mobile provider in several Latin American countries (Bolivia, Honduras, Nicaragua, Guatemala, Paraguay, El Salvador, Panama, Colombia, and Costa Rica) as well as a few legacy African markets which are being slowly divested.

 

It is run by former Liberty Global Exec Mauricio Ramos. In fact, Liberty Latin America offered to acquire Millicom in January for a rumored price of $72/share, which CEO Ramos declined.

 

Ticker: NASDAQ: TIGO

Stock Price: $53.12

Market Cap: 5.4B

EV/EBITDA: 4.8

 

VIC write-up: https://www.valueinvestorsclub.com/idea/MILLICOM_INTL_CELLULAR_SA/9773759942#description

 

NASDAQ introduction call:

 

The largest shareholder is a Swedish group of investors named Kinnevic AB. They own about 37% of the shares and announced on Monday their plan sell about 11% of them through a public offering and distribute the 26% left to their members directly so that they can choose to hold or sell their own shares. Apparently, they have big projects to invest in other ventures in Sweden such as e-commerce so I’d expect the holders to sell as well. The announcement sent the shares down 10% although they have recovered a little bit since.

 

Disclosure: I opened a 5-6% long position on Monday at market open.

Here is what I see:

 

- Cheap price

- Hard-working, honest and charismatic young leader

- Good operational numbers

- Well into their transition to cable + 4G

- Proven ability to build >1 million new connections a year for dirt cheap

- Recent sell off based on technical downward pressure rather than fundamentals (the missed Liberty tie-up + Kinnevic pulling out)

- Liberty probably provides a floor around $72

 

Opinions?

 

[Value92]

Great catch! I just started doing research on the entire global cable space (US, Europe and LatAm)

 

It looks cheap looking at the numbers. In contrast to the foreign Malone assets management delivers operationally.

 

I still have a few open questions:

 

Have you ever met Mauricio? If so, what is your impression of him? Do you think capital allocation will shift towards the levered equity model of Malone after Kinnevik is out?

 

Why are they building HFC and not pure fiber connections? The costs should be the same and fiber is more future proofed. In what kind of way does the network differ from the US and Europe? I know for example that in Europe you have splintered networks which is different from the US.

 

I know that Liberty Global in Europe failed as there is still a lot of friction in terms of regulation between the different countries. Is Latin America different? Allowing just 2 players to survive in each market is definitely different from Europe.

 

Cheers,

Value92

[DeepValuePlay]

Volume is not very large relative to market cap.

My guess is that if 26% is now in the hands of motivated sellers we could see significant forced selling that could bring the share price way down. The next few months may present an extremely attractive entry point...

[WayWardCloud]

The Kinnevik clowns people just withdrew their offer to withdraw...  ???

 

https://ml-eu.globenewswire.com/Resource/Download/56c6b113-776d-4d4a-b566-0dd3e5b900c2

 

Up 10% after hours

[bizaro86]

The Kinnevik clowns people just withdrew their offer to withdraw...  ???

 

https://ml-eu.globenewswire.com/Resource/Download/56c6b113-776d-4d4a-b566-0dd3e5b900c2

 

Up 10% after hours

 

Interesting reaction. I'm not sure +10% makes sense. I don't think that 'sale withdrawn due to poor market conditions' is the same as 'we are satisfied permanent capital.' Seems like any sustained share price increase will probably get the offering re-launched? Makes the overhang not immediate, but still seems pretty real to me.

[WayWardCloud]

Definitely. I just think it has no impact on the intrinsic value of the company so since I'm not a trader at all I let other people worry about those things and I'll be happy to buy more if it drops again due to no fundamental reason.

[mwtorock]

indeed a very interesting idea. thanks.

[WayWardCloud]

The CEO just bought another $2.43M worth of shares, bringing his total stake in the company to around $8.55M

https://ml-eu.globenewswire.com/Resource/Download/6448ee1e-7bef-4ac4-b598-8a90b2d1015b

[WayWardCloud]

Millicom is down a little over 5% today on accounts that their main shareholder, Kinnevik AB, announced they will distribute all the TIGO shares to their clients. Kinnevik also intends to cancel their dividend (which came out mostly of their Millicom investment) in order to focus on doing tech startups PE investments instead.

 

https://www.ft.com/content/3717f360-d948-11e9-8f9b-77216ebe1f17

 

This will probably create a technical downward pressure on the stock for the next few months/quarters as some of those clients will want to unload their shares in the market. I wonder if Millicom will decide to scratch their dividend program as well and replace it with share buybacks now that they're free to do so, which could trigger even more selling, or if they'll maintain it in order to keep some of the dividend hungry shareholder base.

[CookingByTheNumbers]

Millicom is down a little over 5% today on accounts that their main shareholder, Kinnevik AB, announced they will distribute all the TIGO shares to their clients. Kinnevik also intends to cancel their dividend (which came out mostly of their Millicom investment) in order to focus on doing tech startups PE investments instead.

 

https://www.ft.com/content/3717f360-d948-11e9-8f9b-77216ebe1f17

 

This will probably create a technical downward pressure on the stock for the next few months/quarters as some of those clients will want to unload their shares in the market. I wonder if Millicom will decide to scratch their dividend program as well and replace it with share buybacks now that they're free to do so, which could trigger even more selling, or if they'll maintain it in order to keep some of the dividend hungry shareholder base.

 

This is beginning to look like an incredible opportunity. The downward pressure is nothing but a price risk. Fundamentals are still intact and growth story will continue to play out. Assuming a 20% drop in price (possibly more) due to the unloading of shares, and Liberty's price floor of $72, that's an easy ~70% gain (my PT is a lot higher). Seems like a no-brainer.

 

Anyone know of any recent geopolitical risks to be concerned about?

[Value92]

How do you guys deal with the corrupt or even wanted minorities in Guatemala and Honduras? What are your thoughts about corruption in all of Millicoms markets?

[StevieV]

TIGO down big today on earnings.  Existing shareholders coming up next month.

 

[valueinvestor]

How do you guys deal with the corrupt or even wanted minorities in Guatemala and Honduras? What are your thoughts about corruption in all of Millicoms markets?

 

It's on a case-by-case basis and if the owner can do business in a corrupt environment. There are very real risks when dealing with these kind of assets, but it's hard to imagine someone wanting to harm the assets TIGO owns, or at the very least it wouldn't be smart. But as I read in another thread what should happen and what will happen is two different things. My twist is just because it is smart to do so, doesn't mean people do so...

 

Short answer: There's no gurantee against corruption. In fact, you should include it in your assesment whether the risk is worth it or not, because the market is discounting based on that too.

 

Update: Just because it is lip-smackingly tempting, does not mean it is a bad thing. I take it as a time-saver and it allows me to focus on companies with less hairs on them.

[jgyetzer]

Listened to the cc today. This reminds me of CABO a few years ago or CHTR in 2018 when video subs and total revenues were in decline but healthy broadband. With TIGO revenue disappointed mostly due to prepaid mobile with healthy growth in broadband and subscription mobile even in the face of economic slowdown. Plus you’ve got a CEO connected to the Malone universe buying large blocks personally at prices higher than today. Over the next 6-12 months this might get really interesting as Kinnevik exits.  May be price insensitive selling, potentially changes in capital uses with regard to dividends versus repurchase...

[dwy000]

Listened to the cc today. This reminds me of CABO a few years ago or CHTR in 2018 when video subs and total revenues were in decline but healthy broadband. With TIGO revenue disappointed mostly due to prepaid mobile with healthy growth in broadband and subscription mobile even in the face of economic slowdown. Plus you’ve got a CEO connected to the Malone universe buying large blocks personally at prices higher than today. Over the next 6-12 months this might get really interesting as Kinnevik exits.  May be price insensitive selling, potentially changes in capital uses with regard to dividends versus repurchase...

 

I think you're right.  It's going to be tough for the next 3-6 months as the Kinnevik shareholders exit and they shift the capital allocation as a result (get rid of that ridiculously large and costly dividend). 

 

But long term the outlook is quite favorable.

[alwaysinvert]

Johanna Ahlqvist -- Analyst

 

Yes. Two questions, if I may. The first one actually relates to Africa or Tanzania and if you can give us any updates on sort of what's happening there. I know you mentioned that this process is taking longer than expected.

 

And I guess if you do not see sort of proceeds from Tanzania in the sort of foreseeable future, would you expect that -- would you consider to cut dividends to deleverage faster than you currently are? And then my second question, I guess you touched upon this topic before, but you mentioned that September is better than August and July. And I'm just wondering if you relate -- referred to competitive climate or macro or if it's a sort of general comment. Thank you.

 

Mauricio Ramos -- Chief Executive Officer

 

Yes. So I'm going to start with the last one because that's the one that's more present in my mind. The answer is very simple. We had subscriber intake come back in prepaid.

 

You've seen the numbers or we've alluded to the numbers, and with those renewed revenue. And we've been able to therefore stabilize the markets where we have the most competition. And as a result of that, September came back strong on subscriber intake. So that's I think the key reason for that.

 

It just wasn't as strong as we had hoped it would, and therefore my comments before. On Africa, I think indeed we've said before that Tanzania, you should just take a deep breath and allow us to do in Tanzania as we've done everywhere else. But we're going to have to take our timing and a moment to do that. In the meantime, as you saw, the IPO of HTA was accomplished and so was the HPO -- or the IPO of Jumia.

 

So those are assets that now sit a little bit more liquid and well within our treasury department to determine what to do with them and what the right time frame for that is. But I want to address the more important point I think you made just to not leave it sort of up there hanging. Regardless of Africa, and Africa has never factored into our decision making around our capital structure and our dividend or leverage policy. Because we've always known that as much as we're allocating capital from Africa into Latin America, the timing and our ability to execute, good as we have been on it, we've never fully controlled.

 

So it's never been part of our core plan, and I want to be super clear on that. We've never said that money is going to come in in Quarter A or Year 8 and it's going to be allocated to A, B or C. It's always been outside of our planning because we don't control it. And that continues to be true.

 

But I think the most important point here that I don't want to leave that hanging there is that going forward, we actually have on our capital remuneration, buyback, leverage, all of which is part of your question, a pretty good problem to solve going forward, regardless of Africa. If we were to execute on Africa sooner, then this good problem would be sooner and better, and that is that we have operating cash flow that is growing. We're getting pretty close to that 10% growth rate that we have targeted and I have been alluding to. And as Tim remarked, even if our equity free cash flow dips this year, we knew that, and it's coming as a result of the financing and the integration costs of the acquisitions on the back of which we have synergies, procurement savings and a significantly improved operating cash flow profile.

 

And even throughout this year, our equity free cash flow remains pretty solid for the year, and we'll soon go back to that. So what we really have is a pretty good problem on how to allocate that increasing EBITDA free cash flow regardless of Africa. Now, because I don't want to leave the question hanging, we have not changed either our leverage policy nor our dividend or capital remuneration policy, and we see no reason to do so on the back of the delay on Tanzania.

 

Johanna Ahlqvist -- Analyst

 

Crystal clear. Thank you.

 

This is rather interesting for a number of reasons. The analyst mentions Tanzania and then proceeds to ask about cutting the dividend. This is of course a general question which just flowed out of the fact that a potential source of liquidity might not be immediately forthcoming. But Ramos makes sure to carefully couple his answer to Tanzania - they will not cut because of Tanzania (but perhaps due to other reasons?). They have not changed their leverage policy (but perhaps they *will*). Leverage of course has moved from 1.6x a year ago to 3.25x today, albeit that it's somewhat lower on a going forward basis than a historical one due to recent debt-financed acquistions.

 

Also note his unprompted mention of buybacks. Millicom has never done buybacks in the past, although they do have a 5% authorization until next AGM. 

 

All in all, this non-denial denial really does seem to point to a further libertyfication of the company on the capital allocation front. And what would be the actual reason to keep the dividend except inertia when Kinnevik is gone?

 

Will they be ready to repurchase shares into the Kinnevik distribution in early December? Ramos quite clearly thinks the stock is cheap and internal use growth capex has a pretty high bar to clear against the current stock price. Cash 633m currently minus 133m dividend gives at least some room to work with (I don't know how much of that is at parent level and free to use).

 

If repurchasing is indeed the plan, I would expect a scrapping of the dividend shortly after the Nov 5 distribution rather than in connection with the next AGM. In such a case, it only makes sense to eliminate whatever support there could be for the stock price, even if the impact was only minor.

[CookingByTheNumbers]

Johanna Ahlqvist -- Analyst

 

Yes. Two questions, if I may. The first one actually relates to Africa or Tanzania and if you can give us any updates on sort of what's happening there. I know you mentioned that this process is taking longer than expected.

 

And I guess if you do not see sort of proceeds from Tanzania in the sort of foreseeable future, would you expect that -- would you consider to cut dividends to deleverage faster than you currently are? And then my second question, I guess you touched upon this topic before, but you mentioned that September is better than August and July. And I'm just wondering if you relate -- referred to competitive climate or macro or if it's a sort of general comment. Thank you.

 

Mauricio Ramos -- Chief Executive Officer

 

Yes. So I'm going to start with the last one because that's the one that's more present in my mind. The answer is very simple. We had subscriber intake come back in prepaid.

 

You've seen the numbers or we've alluded to the numbers, and with those renewed revenue. And we've been able to therefore stabilize the markets where we have the most competition. And as a result of that, September came back strong on subscriber intake. So that's I think the key reason for that.

 

It just wasn't as strong as we had hoped it would, and therefore my comments before. On Africa, I think indeed we've said before that Tanzania, you should just take a deep breath and allow us to do in Tanzania as we've done everywhere else. But we're going to have to take our timing and a moment to do that. In the meantime, as you saw, the IPO of HTA was accomplished and so was the HPO -- or the IPO of Jumia.

 

So those are assets that now sit a little bit more liquid and well within our treasury department to determine what to do with them and what the right time frame for that is. But I want to address the more important point I think you made just to not leave it sort of up there hanging. Regardless of Africa, and Africa has never factored into our decision making around our capital structure and our dividend or leverage policy. Because we've always known that as much as we're allocating capital from Africa into Latin America, the timing and our ability to execute, good as we have been on it, we've never fully controlled.

 

So it's never been part of our core plan, and I want to be super clear on that. We've never said that money is going to come in in Quarter A or Year 8 and it's going to be allocated to A, B or C. It's always been outside of our planning because we don't control it. And that continues to be true.

 

But I think the most important point here that I don't want to leave that hanging there is that going forward, we actually have on our capital remuneration, buyback, leverage, all of which is part of your question, a pretty good problem to solve going forward, regardless of Africa. If we were to execute on Africa sooner, then this good problem would be sooner and better, and that is that we have operating cash flow that is growing. We're getting pretty close to that 10% growth rate that we have targeted and I have been alluding to. And as Tim remarked, even if our equity free cash flow dips this year, we knew that, and it's coming as a result of the financing and the integration costs of the acquisitions on the back of which we have synergies, procurement savings and a significantly improved operating cash flow profile.

 

And even throughout this year, our equity free cash flow remains pretty solid for the year, and we'll soon go back to that. So what we really have is a pretty good problem on how to allocate that increasing EBITDA free cash flow regardless of Africa. Now, because I don't want to leave the question hanging, we have not changed either our leverage policy nor our dividend or capital remuneration policy, and we see no reason to do so on the back of the delay on Tanzania.

 

Johanna Ahlqvist -- Analyst

 

Crystal clear. Thank you.

 

This is rather interesting for a number of reasons. The analyst mentions Tanzania and then proceeds to ask about cutting the dividend. This is of course a general question which just flowed out of the fact that a potential source of liquidity might not be immediately forthcoming. But Ramos makes sure to carefully couple his answer to Tanzania - they will not cut because of Tanzania (but perhaps due to other reasons?). They have not changed their leverage policy (but perhaps they *will*). Leverage of course has moved from 1.6x a year ago to 3.25x today, albeit that it's somewhat lower on a going forward basis than a historical one due to recent debt-financed acquistions.

 

Also note his unprompted mention of buybacks. Millicom has never done buybacks in the past, although they do have a 5% authorization until next AGM. 

 

All in all, this non-denial denial really does seem to point to a further libertyfication of the company on the capital allocation front. And what would be the actual reason to keep the dividend except inertia when Kinnevik is gone?

 

Will they be ready to repurchase shares into the Kinnevik distribution in early December? Ramos quite clearly thinks the stock is cheap and internal use growth capex has a pretty high bar to clear against the current stock price. Cash 633m currently minus 133m dividend gives at least some room to work with (I don't know how much of that is at parent level and free to use).

 

If repurchasing is indeed the plan, I would expect a scrapping of the dividend shortly after the Nov 5 distribution rather than in connection with the next AGM. In such a case, it only makes sense to eliminate whatever support there could be for the stock price, even if the impact was only minor.

 

Solid points and excellent job reading between the lines. Just curious, whats your source for Nov. 5 share distribution? @alwaysinvert

[alwaysinvert]

I was probably being a bit confusing discussing both the share distribution and the upcoming dividend distribution.

 

Dec 5 is the day when Kinnevik stockholders will be able to sell their regular Millicom shares over the market if they do nothing with the subscription shares. Nov 5 is when Millicom trades ex-dividend ($1.32 in cash). Sources are the IR sites of respective companies.

 

Some further liquidity incoming today apparently: https://ml-eu.globenewswire.com/Resource/Download/c91a97ab-1103-43a1-b18f-7391ed68b482

[kab60]

I like the insight the CEO has into Charter (and I hate missing that boat after taking a good look last year), I like the Liberty put option and the insider buying, and I like how prepaid somewhat distorts the high growth in cable.

 

But how do you square the acquisitions versus buying back stock? This thing is trading around 4,4xFY19 ebitda estimates. Before synergies they paid 6,8x for the Telefónica assets (5,8x after) and 7,9x for Cable Ondas cable assets in Panama.

 

Between low float and the benefits of lower churn through convergence it might make good sense (and I definately see the attraction), but anyone care to take a stab at a reasonable price? Cable is growing, but they're still very dependant on mobile. And i hate hate hate their definition (and focus) on OCF (which they define as ebitda-capex).

 

Anyone did the homework on sorta steady state cash flow? There's obviously a lot of moving pieces with the two acquisitions as well as refi activity.

 

Update: Might've messep up their FY19 estimate (which I pulled from Sentieo). Seems like they "only" did 1,106m ebitda from jan-sep 2019 when backing out the non-controlled stakes in Guatemala and Honduras but that's also with only partly contributions from their acquisitions. Messy. :)

[WayWardCloud]

But how do you square the acquisitions versus buying back stock? This thing is trading around 4,4xFY19 ebitda estimates. Before synergies they paid 6,8x for the Telefónica assets (5,8x after) and 7,9x for Cable Ondas cable assets in Panama.

 

That seems to be true of most cable assets everywhere these days. There's simply a big valuation gap between what public investors and private investors are willing to pay for them. Or, as Malone puts it: "In this industry you're often worth more dead than alive". So in theory a completely rational cable company should even go beyond not growing and buying back stocks, it should sell all its assets and distribute the money to its owners. That's what LBTYA seems to be doing so far. As much as the Liberty family (I count Ramos in, he's basically a cousin) loves buybacks, the growth mindset runs deep in their DNA. Or, as Malone puts it: "One cookie now or two cookies later".

 

I'd say there is a decent chance the dividend is about to get cut and replaced by buybacks, which would make me very happy. Like maybe 20-30%? Unfortunately, managements often have a hard time cutting dividends because it's perceived as a failure and sends the stock twirling down.

 

And i hate hate hate their definition (and focus) on OCF (which they define as ebitda-capex).

 

Could you please elaborate?

[kab60]

But how do you square the acquisitions versus buying back stock? This thing is trading around 4,4xFY19 ebitda estimates. Before synergies they paid 6,8x for the Telefónica assets (5,8x after) and 7,9x for Cable Ondas cable assets in Panama.

 

That seems to be true of most cable assets everywhere these days. There's simply a big valuation gap between what public investors and private investors are willing to pay for them. Or, as Malone puts it: "In this industry you're often worth more dead than alive". So in theory a completely rational cable company should even go beyond not growing and buying back stocks, it should sell all its assets and distribute the money to its owners. That's what LBTYA seems to be doing so far. As much as the Liberty family (I count Ramos in, he's basically a cousin) loves buybacks, the growth mindset runs deep in their DNA. Or, as Malone puts it: "One cookie now or two cookies later".

 

I'd say there is a decent chance the dividend is about to get cut and replaced by buybacks, which would make me very happy. Like maybe 20-30%? Unfortunately, managements often have a hard time cutting dividends because it's perceived as a failure and sends the stock twirling down.

 

And i hate hate hate their definition (and focus) on OCF (which they define as ebitda-capex).

 

Could you please elaborate?

Because their so-called OCF isn't operating cash flow - it ignores both interest and taxes while it includes capex. So when they guide towards +10 pct. OCF growth I suppose they can simply hit their targets by lowering capex (haven't seen anything to indicate that they try to game this).

 

I like ebitda as a starting point, but cash should be cash. :)

 

Their reported "organic" growth in their presentation also ignores currency effects it seems. But when you operate in countries with much higher interest rates, currencies usually do depreciate. So by ignoring currency effects you get the benefits from higher inflation through higher revenue. And then you "ignore" how that devalues the currency, so the optics are better.

 

So when Millicom points towards organic growth in its presentation it seems it ignores the currency effects of operating in LATAM where the 10-year isn't trading at sub 2 pct... (only about half is linked to USD, more proforma of acquisitions).

 

A lot of companies do this - Philip Morris, Carlsberg - probably the norm rather than the exception. It's not like it's rocket science to figure out, but I think it's disingenious.

 

Seems when you look at the actual numbers and not their presentatios that revenue is flat from 2016-2018. And while cable is growing, it seems to have only grown 10 pct. from 2016-2017 while basically flat in 2018. Now, the stock is down, so it is all probably reflected in the price, but it hasn't exactly been a growth company (despite the large number of cable and 4g adds). Those investments might be necerassary just to keep the status quo?

[dwy000]

I like OCF.  To me EBITDA is just ignoring a fundamental part of operating the business (capex) like it is discretionary or can be cut to zero.  To compare EBITDA in a software business vs a high fixed cost and hard asset business is apples to oranges.  OCF is a much more accurate view of the cash the business itself is churning out to fund capital decisions. Even better would be maintenance capex vs total.

[CookingByTheNumbers]

November 7th was the Extraordinary General Meeting.

Looks like tomorrow is the effective date to receive redemption shares.

 

https://www.kinnevik.com/media--contact/press-releases/2019/11/2199994-Kinnevik-Extraordinary-General-Meeting-2019

[alwaysinvert]

I happened to catch live most of the Morgan Stanley presentation on Thursday. The recording has for some reason not been reuploaded yet, so I'm working entirely from memory here. There was a question on the dividend from the moderator towards the end. The CFO basically answered that they were not going to revise the policy until the end of the year ("as usual") due to the technical overhang and turbulence connected to the Kinnevik transaction. This is a curious thing to say if they don't plan on changing it in a negative direction, so I take this as almost complete confirmation that they will at the very least lower the dividend but most probably cut it completely.

 

Will this eventual "news" put even further pressure on the stock at that point? Typically the Swedish investor base is very dividend focused and companies who cut their dividend get severely punished on the day even when it was perfectly obvious beforehand that they would do so for anyone who could care to look. Most likely some former Kinnevik owners who has elected to hold onto the stock will throw in the towel on a dividend cut, especially considering the current juicy yield on historical numbers.

 

Of course, all this may be superceded by other events and the stock price could very well rise a lot in the interim. Who knows?     

 

As an aside, this answer in a circuitous way also extinguished the small hope I held out that they would do some buybacks into this recent price weakness - we will probably have to wait until next year for any buybacks. The reasoning being: why not sink the stock price even more if you are going to do repurchases?

[Spekulatius]

I guess the question is if this is really cheaper or higher quality than for example a pure play like LBTYK or MEGACPO.MX. I think especially the latter is more appealing with a pristine balance sheet no wireless exposure and trading at 6x EBITDA.

 

TIGO look cheap based on EBITDA, but it seems that maintenance Capex is very high and consumes most of the cash flow. It’s hard to tell for sure, with so many moving pieces though.