TIGO - Millicom

[alwaysinvert]

A speculation is that the large swoop of dividend cuts on the Swedish stock exchange already happened a while ago and that investors thought this one was safe now. They also didn't put in any hedging language about evaluating the situation in the fall with regards to  capital returns which has been customary. So I think they spooked the market. Me myself I would be happy for the dividend not to return at all. 

 

As for the actual operations, I didn't find anything very out of line with my expectations. The one thing that is very difficult to calibrate is the levels of bad credits/non-payments they expect going forward. And maybe they don't quite know themselves. There was a euphemistic paragraph about customers feeling "confusion" in the report which raised an eyebrow. Even if they are very liquid for the forseeable future they may be stress-testing different scenarios (fx, non-payments, political headwind) to see how close they could get to breaking some bond covenants. I don't see that this is a big risk currently, fwiw. But it makes sense to protect the equity from the outside possibility.

 

Ramos is a terrifically good communicator.

 

If this ends up relatively benign and they can put the Costa Rica money back into repurchases...

[alwaysinvert]

Millicom’s operating and financial performance was severely impacted by COVID-19 beginning in mid-March 2020;

actual results for second quarter 2020 reflected weak performance in April and May, followed by slightly improved performance in June;

the improved trend that began in June has continued throughout the third quarter, with most business lines and most countries experiencing better performance in the third quarter as compared to the second quarter of 2020, although key indicators generally remained meaningfully below pre-COVID levels.

Millicom will report its Q3 2020 results on October 30, 2020.

 

https://millicom.gcs-web.com/news-releases/news-release-details/millicom-provides-trading-update

 

More significantly, they are pushing out maturities for a $500m bond 6 more years with the same interest of 6%: https://millicom.gcs-web.com/news-releases/news-release-details/millicom-announces-proposed-offering-senior-notes-and-intent

[alwaysinvert]

 

"$TIGO new $500m 2031 bond issue with an IPT of low 5's coming in at 4.625% +/- 12.5bp! Exploding head Books +10x done, investors chasing that yield! $TIGO $ 29's offer YTW of 4.8% but huge cash price. Madness"

 

I can't verify this info since I don't have a Bloomberg but compare the pricing of Tigo bonds pre- and post-covid vs equity. If Tigo can roll all their maturities 137.5 bps lower and lengthen them by 5 years on average, then what will the equity be worth? The incongruence between markets here is nuts.

[alwaysinvert]

Tigo just sold more stock in Helios for about $100 million.

 

Both Tigo and LILA has had a decent run lately, but there is a lot more room to move to get back to pre-covid levels like so much else that is deemed cyclical has. Tigo's bonds trade at lower yields than in February, while the stock market still doesn't seem to have let go of the old narrative completely. The recent 4.5% 2031 issuance is now trading at 106%. Latam is entering summer and plateauing the spread and the stock had a big boost from the first vaccine news. If there is not a major pricing in of drops in remittances from a worsening/closing US economy, this bounce should be far from done - same goes for LILA.

 

Recent presentation from Mauricio Ramos: https://morganstanley.webcasts.com/viewer/event.jsp?ei=1401390&tp_key=f1cc1da9d1

 

I would expect them to make official a new capital returns policy early next year and that there will be a buyback component but no near-term dividends. Could be that the buybacks will take a bit longer to then actually restart, but there only seems to be a bit more to do in pushing out maturities (the 2024-2025 lapses) and paying off long debt early now doesn't make any sense to me whatsoever. The market may like it and reward them on a market cap basis, but if they can't hold 5-10y debt at this level with these interest rates, then the business model is fundamentally broken.

 

Ramos strikes me as overcautious at this point, but there may be some strategic angle that I am missing here.

[Munger_Disciple]

Yes, Ramos sounds extremely cautious on the MS call. He has basically batten down the hatches and the only thing he is going to do in 2021 is push out maturities of debt at a lower rate and keep de-levering. I don't think there will be any buybacks at least for a year.

 

Liberty Latam on the other hand seems to be on the offensive; they just closed the AT&T deal. Perhaps TIGO's service footprint suffers from more political and regulatory uncertainty than Liberty's. Plus Ramos thinks COVID-19's effects will linger on in the region for much longer than a year.

[NotSoWise]

A point to consider is that Ramos mentioned that there wont be any price increases in 2020 and 2021 not to invite regulation (LILAK probably the same). With depreciating currencies in LATAM, it means some pressure on USD/ reporting currency ARPU. This was also visible in LILAK 3Q numbers, when USD ARPU declined. My expectation for USD organic growth is very low for 2021, they will announce some conservative projections due to the virus. LILAK will look nice with consolidated PR and CR, thou.

 

Short term LILAK/ TIGO strategy is to grow volume, in particular in broadband, but at some point they will have to raise local currency ARPUs. This is a disadvantage when comparing to CHTR, as CHTR does not have issues with ARPU due to USD operating currency. Organic growth for CHTR is somewhat comparable over the next few years. On the other hand LILAK and TIGO have lower valuations and more long term runway until saturation, but at currency/ political and potentially somewhat climate risk.

 

Having all three, it is not obvious for me which is the best of them at the current prices.... with CHTR being the least risky.

 

As for TIGO, my understanding from the call is there is not going to be any dividends or buybacks in 2021. I think he collects cash for a potential M&A deal (by repaying debt - holding large cash on BS would be questioned by shareholders). COVID gives him a good excuse to justify and accelerate building cash (or debt increase potential) - as no dividends and no buybacks.

[alwaysinvert]

As for TIGO, my understanding from the call is there is not going to be any dividends or buybacks in 2021. I think he collects cash for a potential M&A deal (by repaying debt - holding large cash on BS would be questioned by shareholders). COVID gives him a good excuse to justify and accelerate building cash (or debt increase potential) - as no dividends and no buybacks.

 

This makes sense and was what I had in mind with the strategic angle. However, he has been categorically negative towards any M&A questions lately. He could have easily taken a somewhat softer stance if this was the idea (something like "right now is not the time, but we are open to possibilities in the future"). But who knows, he could be talking down his eventual interest in order to keep down prices too. After all, there aren't many buyers around for those assets.

[alwaysinvert]

As for TIGO, my understanding from the call is there is not going to be any dividends or buybacks in 2021. I think he collects cash for a potential M&A deal (by repaying debt - holding large cash on BS would be questioned by shareholders). COVID gives him a good excuse to justify and accelerate building cash (or debt increase potential) - as no dividends and no buybacks.

 

This makes sense and was what I had in mind with the strategic angle. However, he has been categorically negative towards any M&A questions lately. He could have easily taken a somewhat softer stance if this was the idea (something like "right now is not the time, but we are open to possibilities in the future"). But who knows, he could be talking down his eventual interest in order to keep down prices too. After all, there aren't many buyers around for those assets.

 

This might be the explanation: https://www.valoraanalitik.com/2020/11/29/epm-vender-su-participaci-n-en-tigo-une/

 

No use in looking keen when a seller is looking for an out.

[NotSoWise]

Good catch... worst case it should be done at a fair price, with base case price being attractive (e.g. ATT for LILAK - willing seller, not many other buyers). If you are an industry insider with local operations (and co-shareholder...), you usually know at least 3-6 months before things appear in the newspapers, so they have been preparing for this for quite some time. I would even say they have already agreed on the price. Deal should be quick and simple (no DD, etc). Good news overall.

[alwaysinvert]

Here's some more detail on the the stake sale in UNE: https://www.larepublica.co/economia/la-venta-de-une-es-una-opcion-que-esta-sobre-la-mesa-y-es-lo-responsable-con-el-futuro-3095834

 

So seems like the sale is about a year out and subject to a parliamentary vote for approval. Sadly, I'm not up enough on the politics of Medellin to know if this vote is a mere formality or will prove meaningfully politically contentious.

[NotSoWise]

You are right, does not look so easy or quick due to political decision process. Given deal timing, most likely no dividends and no buybacks in 2021.

[alwaysinvert]

Probably correct and it would make perfect sense. But we might also be surprised at how well Tigo can further tap the debt markets in the near to mid term. Or at least I hope so. If also combined with more non-core asset sales they could have ton of liquidity going forward. I think they should really try and push the wide chasm between debt markets and equity in this area, whether they do that by buybacks or acquisitions doesn't matter to me, but they should take the chance to push the envelope now when they can get more long cheap financing and buy hopefully growing assets at 5x.

[NotSoWise]

https://www.gsma.com/mobileeconomy/wp-content/uploads/2020/12/GSMA_MobileEconomy2020_LATAM_Eng.pdf

 

interesting report on mobile market in LATAM, from recent conference TIGO CEO participated (more info on TIGO IR page).

[alwaysinvert]

Fundamentally, right now, I don't think it's rational to pay off debt so far off from maturity as 2026-2029 if it's not in conjunction with rolling over to cheaper/longer financing. They don't want to start doing buybacks until the second half of the year in order to keep up their flexibility, but sacrificing cash for redeeming long maturity bonds at a premium is apparently fine. Doesn't make sense.

 

If they didn't do either then it would at least be consistent. There may be an important credit rating angle in combination with a future merger consideration that I'm missing in this equation, but if so it's not something that management has cared to share or even vaguely hint at.

 

I suppose they really don't want to bring further attention to the UNE/EPM situation, and that's fine. But it would still be very easy to hint in broader terms at what the strategic angle is with financing if there is one. Ideally, Tigo would get to buy out the their partner in Colombia and then relative shortly after have some market consolidation. If that happens, this company will be a lot more valuable.

 

[NotSoWise]

Overall, 4Q results were quite good. When you read the transcript, you get the impression that there is a good chance for an upside to guidance. Given more debt repayment and possibly buybacks in 2H 2021, TIGO price should do well this year (assuming Covid situation improves).

[alwaysinvert]

Yeah, the results were great. The fiber component will grow a lot going forward. Operationally it was all positive.

 

But I severely question the judgment of paying back these long duration bonds for 103% of par when they choose to manage OCF at a certain level while a lot of capex is so clearly accretive and the stock is still completely in the shitter. They manage to miss their OCF target for the year of 1.4b to the upside by 100 million due only to Q4 performance. This despite increasing capex compared to earlier assumptions. And the stock is flattish after the report. You have to be some kind of PR anti-Midas to thread that needle.

 

I really don't get it, and they provide no explanation except wanting to lower interest costs and move towards the 2x target. Well duh. If they can't roll these loans later or pay them back, the business model isn't working anyway, so who cares then? They can't beat a ~6% hurdle with more growth capex or buying back stock? There is no real risk minimization in this move and thus it makes no sense for a thinking person if not for some other possible unmentioned motive.

[dwy000]

Is it possible the $600mn bank facility from October includes covenants that could be breached without the debt reduction?  Most covenants are net debt so repaying with cash should not impact it at all but I can't figure out otherwise what the rationale is for paying such a large premium to repay those bonds.  It's not even eliminating those bonds, it's a partial repayment of each. 

[WayWardCloud]

I agree with both the points above (puzzling use of cash flows but solid results).

 

In a world of very low returns on debt, how come Latin American cable operators still borrow at such high (5.5-6%) rates?

LILA and TIGO just went through a horrendous situation without getting seriously close to defaulting so it seems to me that they have proven their resilience to bond holders and banks.

 

I wonder what Tigo Money would be valued at if it were its own company? They could IPO the stub on the NASDAQ and would most probably receive a very rich valuation, use the proceeds to both accelerate the fintech growth and the buybacks/new builds on the cable side. Tigo Money may very well be the hidden crown jewel of Millicom down the line and it got a big acceleration from covid.

 

All in all, and despite the recent questionable use of cash (which we might not understand because we are not given the full picture), this looks like such a coiled spring to me and i see everything getting nicely into place for a huge run up, baring risks inherent to emerging markets (currency, political).

 

 

[alwaysinvert]

I can't find all the details but apparently UNE EPM lifted $139m in COP denominated bonds last week, which could partly explain the early redemption of USD bonds. Three tranches, 7-15y with the 7y yielding 5.56%. The early redemption certainly looks a lot better if we view that as a swap with longer maturities and debt in an over time more inflationary currency. Of course, only 50% of this new debt is proportionate to Millicom, so it can only be a partial explanation.

 

Anyway, Pareto released a sellside report today which was pretty decent. They think Tigo Guatemala by itself is worth $32 per share.

 

edit: I had some clarification from IR - the COP issue means no change in gross debt and is replacement for earlier local financing, a remainder portion which was in USD. So better currency matching but no relation to the bond redemptions. The other two tranches were "10 and 15 Year variable rate issues with 2.61% spread, implying 5.69% and 6.28% currently".     

millicom-pareto.pdf

[HeadOfLeverage]

The report looks quite conservative both on the deleveraging after covid and the revenue/ebitda growth in my opinion. I have a hard time believing that they won't try to reach their goals for homes passed etc. But I guess you can't publish a report with a target price too far from the current price.

[alwaysinvert]

Tigo isn't doing all that much on this incredible oil strength (and LILAK melt-up for that matter), whereas it has been very correlated with weakness in oil/the Colombian peso before. This market really only cares for the very purest of themes.

[HeadOfLeverage]

In the risk section of the annual report, under Technical transformation and

convergence, they say "With fixed and mobile businesses in each

of our strategic markets".

 

Do you think this means that Costa Rica is not considered strategic? Or am I reading too much into it?

[alwaysinvert]

Yes, I think that’s correct and Ramos did express as much at some point. It makes no sense to stay in CR if they don’t have to after they let go of the Telefonica deal to LILA.

 

As I have mentioned earlier, Tigo should ideally swap this asset with C&W Panama, which LILA interestingly started breaking out separately in Q4.

 

This quote from the LILA cc was interesting:

 

”On Panama, I think you know Panama you can clearly see the numbers there. And we are very focused on it. We have a great government partner there. We are very excited about that part of the world. We think in Central America, Panama and Costa Rica, the two best markets. I mean both of them. And you'll see when we put more - I think it's probably a good thing, that we're going to put more attention on Panama. And over the next quarters on that to I think - stay tuned, you'll start to see some positive outcomes there.”

[HeadOfLeverage]

Thank you for your answer. I had missed that comment from the LILA call and never seen Ramos talk about any of their latam markets as non-strategic. Sounds to me like a deal is almost guaranteed to be done.

[alwaysinvert]

For Costa Rica, I guess it's price dependent and also regulatory approval obviously. I think their view is that a standalone cable provider is in less of an immediate hurry than a non-converged telco. But it's not like it's a completely terrible asset even in its current form.

 

As for Panama and LILA there was another exchange around that on the call

 

Kevin Roe

 

A couple of questions first on Panama. Do you think, is your crystal ball showing this could be the year for mobile consolidation? And on M&A in general you clearly reiterated your disciplined M&A strategy and the free cash flow accretive benchmark?

 

But has COVID altered your appetite at all or changed your return thresholds for acquisition targets has COVID over the past year bubbled up any new opportunities or closed the doors on some?

 

Balan Nair

 

Yes, hey Kevin, on Panama let me say that we've always thought that mobile consolidation that makes sense. And we've all always said to be a buy you have to have a seller. And right now everybody says this, not everybody, but at least a couple said they are sellers. But we've not been able to convince them that selling means actually selling at a price that makes sense to everybody.

 

So as a result not much of move in Panama and, but I remain optimistic over time that it will get rational. And something will break loose there. On the M&A front, you're right, we're very disciplined and to your question does COVID increased opportunity? I think all the opportunities out there are well known and of course - we look at everything that becomes available. We are quite opportunistic.

 

Panama is a four player market on the mobile side: C&W, Tigo, Claro and Digicel. Claro is pretty much never a seller, so that leaves two other possible ones which by the sounds of what he's saying both are open to selling/merging at the right price.