|Shares Out. (in M):||65,760||P/E||11.2||10.4|
|Market Cap (in $M):||1,111K||P/FCF||11.2||10.4|
|Net Debt (in $M):||547,000||EBIT||129,052||135,000|
|TEV (in $M):||1,833K||TEV/EBIT||14||13.5|
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America Movil is one of the largest integrated telcos in the world with over 400 million accesses and operations in 25+ countries. AMX is the 4th largest wireless operator by subscribers.
The largest operation is Mexico, followed by Brazil (25 and 23% of wireless subscribers), whereas measured by RGU’s Brazil is the most important operation (45%) followed by Mexico (27%).
In Latin America, AMX has approximately 45% of the wireless market and is by far the largest provider of broadband services and pay tv.
In addition to its operations in LatAm, AMX has an MVNO in the US. The fifth operator in the country, and the largest in the world with in excess of 26 million clients.
Data represents almost have of the company’s revenues while Pay TV is around 10% and climbing.
Throughout its history, the company has invested heavily in order to build their fiber backbone and have the best network in Mexico as suggested by customer reviews and of course confirmed by their market share. The company has invested in excess of US$60 Bn since 2010.
The company is controlled by Mr. Carlos Slim and his family and throughout its history management has demonstrated a very prudent capital allocation policy. First and foremost by reinvesting in the business (as evidenced in their CapEx) and returning excess cash to shareholders in the form of share repurchases (they’ve bought back close to 15m shares or 20% of the company during the last six years) and dividends.
What has happened in the recent past? Why the opportunity?
Mexico has historically been the most profitable market for AMX where EBITDA margins were as high as 52% in 2010 and currently stand at its 10 year low of 32%
The reason behind this is fairly simple- deepthroat competition in the country and a regulatory framework that in our opinion gave an unfair advantage to the competition in the sense that up to now, they can “interconnect” with AMX’s network for free. Something really extraordinary since AMX is effectively not being compensated for all the investments that they’ve done over time.
The largest player in Mexico is AMX followed by AT&T and Telefonica Spain.
To put in perspective the competition we’ve seen consider this- average mobile plan rates have fallen close to 70% since this new regulations came into effect and due to the price wars that competitors began to carry out.
Although greatly beneficial for users in Mexico the latter has come at a heavy cost to the three players, much more so for AT&T and Telefonica.
Consider this- all postpaid plans in Mexico include unlimited minutes and (for the most part) data between the USA, Canada and Mexico. With no roaming charges whatsoever.
It has gotten to a point so absurd that AT&T’s ARPU while close to $55 dollars in the USA 80% less in Mexico.
You would benefit in cancelling your AT&T plan in the USA and switching to AT&T Mexico. This is something that we thought could not go on forever since as said, both competitors are losing money in the country.
In the case of Telefonica, when prices were firm (2012 to 2014) they really maintained CapEx to a bare minimum as cash was sent over to the holding in Spain. When competition broke out of course cash flow has suffered and their capital expenditures have remained very low. As a consequence their network is without question the poorest in the country and in heavy need of investment.
If this competitive environment was not enough, the mobile market has been liberalized but due to a really bizarre political decision, even though AMX has consistently done what was required by the regulator, the company has yet to be awarded the ability to offer Pay TV services to its customers in Mexico.
This has been going for six years now and has reached a point in which not to award Pay TV to Amx is all but unjustifiable.
The two dynamics here mentioned are actually the largest catalyst’s for AMX. The market is firming in Mexico. At least the competitors are now being less promotional and ARPU’s have stabilized.
Next week, Tuesday is a big day, as the courts in Mexico have deemed unfair practice that the regulator imposed a zero interconnection rate to AMX disadvantage. They have reversed the ruling and interconnection rates will be announced next week.
We believe this will have two good effects for America Movil, the first of course being that they’ll have extra revenue from this line that was non existent before, the second that given this new competitive reality promotions in Mexico should begin to subside and prices should firm.
We believe further delay in granting the Pay TV license to AMX is also almost unjustifiable now. Although there are some further steps the company believes should happen before that occurs, namely the functional separation of Telmex into two companies (infrastructure & network, wholesale & retail), once that is executed (1Q18 expected) we believe regulators won’t much arguments left to granting them the license.
We expect 2H18 for that happening. When that happens it’s only more margin for AMX. Essentially they have the FTTH, customers, content already set up. It’ll be margin accretive from day one.
The company’s strategy here is to replicate what they’ve achieved with Claro in Colombia, where their offering includes streaming, video on demand and live TV with DVR included. The plan is to introduce this same services in Mexico, Argentina and Brazil. They now have revenue sharing agreements with Fox Premium and HBO GO and of course, they now also produce proprietary content for their platform.
The future ahead...
Data is a big driver here. Smartphone penetration in Mexico is still only 50%, as customers migrate to them, the growth in Data revenue should be exponential. In the case of Brazil (because of the fact that the government imposes a 100% tax to non-Brazil made smartphones) penetration is even lower. Close to 30%. A big opportunity in our mind. Smartphones use 50x more data than regular phones thus affordability is key. Today you can buy a Huawei Smartphone for $70 usd in Mexico. That is something unthinkable only a few years ago.
How fast can penetration grow? Consider this-
In 2015 only 25% of Mexico’s population had smartphones, today it’s close to 50% and could reach as much 85% by 2020 as smartphones become more affordable.
The story in LatAm is similar- Smartphone penetration is 30% in Chile, 30% in Brazil, 30% in Colombia and 15% in Central America.
What about broadband?- Fixed broadband penetration is also extremely low in Latin America, 13% in Mexico, Brazil and Colombia. AMX is the largest triple player in Latin America with 22 million clients.
A very interesting new growth opportunity- ICT services. AMX has the network in place to grow exponentially by offering a fully integrated platform including services such as cloud computing, data analytics, security, vertical solutions, fleet management and advertising.
If you want to get a sense how good an operator AMX is, you need not look further than the transformation that has happened within Telekom Austria since the company effectively took control over its operations.
During the last 18 months all metrics are up- subscriber acquisition, revenues, ARPU, profitability all while increasing significantly the investment in the network which of course made customer satisfaction increase substantially. Telekom Austria is the best telco stock in Europe over the last 12 months and we believe it is only a reflection of the overall turnaround of its operations.
Tracfone in the US has also been a success story- $8 bn USD in revenues with a client base of 24 million. They were the first ones to introduce the prepaid system to the US. ARPU’s climbing from $7-$8 USD to $12-$14 recently.
Well of course we couldn’t do a complete writeup of AMX without discussing Brazil. As we all know the country is in the midst of its economic recovery but many things still need be done (regulatory in some part) in order exponentiate its growth. AMX is the second player in Brazil after Telefonica. In reality those are the only two fully integrated telco companies in the country that offer fixed, broadband, mobile and PayTV. Telefonica in Brazil is a great competitor. The third player (Telecom Italia) is more of a niche player as they are only concentrated in mobile and have a less affluent subscriber base. Although a very profitable operation that should continue as a niche player as said. The fourth largest player is Oi which is essentially about to disappear. They are in such financial distress that we believe the outcome is all but inevitable.
The result of Oi disappearing should be positive for the market in general and should strengthen the top three players all together.
Finally it’s also worth discussing Argentina- at present the law prohibits a telco to offer PayTV and vice versa. It is expected that this will change soon as AMX is ready to enter the market when allowed. The company has 600k households passed and plans to reach their footprint to 3 million in the near future. Another marigin opportunity here.
We like the future but the icing on the cake is free cash which should ramp up...
We believe that the big investment phase is largely behind us- the 4.5G network will be operational by the end of the year (AMX being the first player in the region to introduce such technology). Going forward, the transition to eventually 5G will not be as expensive as the backbone of the network has been set and technology become cheaper. Consider that the cost of installing fiber has dropped 80% in just ten years.
Heavy CapEX investments are largely over and the company has guided to between $7 and 7.5 billion USD in capital expenditures for the next three years. That immediately means around 3bn USD of extra free cash flow to shareholders.
Wrap up and valuation
We’d summarize our thesis in America Movil in some key points-
We’re buying with the lowest margins that Mexico has seen in it’s history with a clear path to improvement due to data penetration, regulations being reversed (interconnection rates) which should further aid in firming pricing and potentially after a six year delay the company being authorized to offer PayTV to its client base.
The second largest market (Brazil) also at a cyclical low, coming out of a prolonged recession and showing slow but steady operational improvements which should be greatly aided as the 4th largest player in the market essentially disappears.
Argentina also a nice catalyst as the law is expected to be amended allowing telco companies to offer PayTV and vice versa.
Austria and the US nice bright spots.
Declining CapEX and increasing FCF.
Now let’s touch upon valuation- we are not factoring any of the above factors (1 to 3) in our valuation. If we were to do that we’d have to revise our revenue and assume increased margin. We don’t need to. Only due to the decreased CapEx we estimate AMX should generate between $6 and 6.5bn usd in free cash flow during the next couple of years that yield us a 9.8% free cash flow yield today that will climb to 12% in 2019 as the company de-levers.
Leverage today stands at roughly 1.9x EBITDA and should fall below 1.4x next year with cash generation. The company has said that they intend to restart their share buybacks and increase shareholder distributions when they are below the 1.5x net debt threshold.
In summary, we like getting all this growth essentially for free and we believe catalyst are just around the corner while the market has decided to take a wait and see approach.
Using a 15x p/fcf multiple (again without adjusting for points 1 to 3 above) yield us a target price of $23.5 almost 40% upside, two years out. Current valuation metrics are 15.9% ROCE, 6.3x EV/EBITDA, 11.2x P/FCF and 1.9x NetDebt/EBITDA all 2017 in our estimates.
Interconnection rate announcement next Tuesday, PayTV license in Mexico being granted.
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