Description
Introduction:
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BTM is the cheapest wireline telco in the LATAM region with low leverage and very good and sustainable cash flow generation. It is trading at 1.9 x EV/EBITDA multiple for 2005, it is cheaper than CANTV (the Venezuelan telecom). So what is wrong with it? The main issues dragging stock performance are: 1) shareholder disputes that remain unresolved, and 2) the market are unconfortable with its mobile strategy because they have delays and changes in it and they will be the 4th competitor in its region. However, the valuation is too compelling and the problems listed above are not permanent. The company has a website in English/Portuguese with all info filled at SEC and CVM, which is: http://www.brasiltelecom.com.br/site/inst_ri_brt_us/index.jsp#
Description
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BTM is the wireline operator and a mobile license holder for the central-western and far southern Brazil, this area is bigger than Mexico. It has a virtual monopoly for fixed-line service in those regions, and the central-western region is growing its GDP at 50% more than the Brazilian average fueled by the agribusiness (soy beans, corn , meat etc.).
The company is the 3rd largest wireline operator in Brazil, but has almost a monopoly in its region, which has 24% (42 million) of the Brasilian population and 25% of the GDP. BTM has 9.6 million LIS with a penetration of 24%, besides that it has metropolitan networks for data transmission in São Paulo, Rio de Janeiro and Belo Horizont which are outside its concession´s region. Additionally, the company has 2 submarine fiber optics cable rings that connects to Bermuda and USA . BTM can offer all kind of telecom services for its clients, from ISP to ADSL, data transmission to ILD, and in the next quarter will be supplying mobile services.
Valuation
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I used as base for my calculation data taken from UBS reports which have a good coverage of the Brazilian telcos.
Each ADR is equivalent to 3,000 non-voting shares , however for calculating the market cap I converted all shares (voting and non-voting) issued to the same scale of the ADR, so we get the equivalent to 181,722,288 ADRs.
Market Cap = US$ 1,979 million
Net Debt (2005) = US$ 700 million
Enterprise Value = US$ 2,679 million
Operating Free Cash Flow (2005) = US$ 1,080 million
Ebitda (2005) = US$ 1,414 million
EV/Ebitda = 1,9x
EV/OpFCF = 2,5x
Investment Concerns
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1) Fight between Telecom Italia and Opportunity
The fight for the control of the parent company – Brasil Telecom Participações S.A (ticker – ADR: BRP) is between Telecom Italia/Brazilian Pension Funds and Opportunity Asset Management, and there are many lawsuits proposed by Opportunity against Telecom Italia and its directors in Brazil due the high price paid for CRT Telecom and by forbiden Brasil Telecom from participating in the first auction for a mobile license. Besides that, there is a conflict of interest between the shareholders of Brasil Telecom and Telecom Italia because TIM has a huge mobile operation in the country. The CADE (anti-trust authoriy) can take measures against TIM because they could reduce the competition in the sector if they gain control of Brasil Telecom or through their voting veto powers TIM can force Brasil Telecom to exit the mobile and the long-distance business.
However, the Opportunity has the best army of lawyers fighting against Telecom Italia, and ANATEL, the telecom regulatory agency, gave until July/2005 for them to reach an agreement. Despite all this confusion, the company itself is not been affected by the fight so far, which is been run by Opportunity people.
2) Investment in Mobile Services
The company said that capex will reach US$ 350 million until December/2005 in order to offer mobile services in 544 cities and in the main roads. The low investment is due that the prices for mobile equipment decreased a lot since 2000 and they will share the facilities used by the wireline operation. So far the company invested in mobile US$ 120 milion, in the 2nd half of 2004 will be US$ 180 million and the remaining wil be in 2005. The company announced a strategy that explores its main competitive advantage which is its client base of wireline services. Besides that, BMT is taking steps for service convergence, therefore calls from a wireline phone to their mobile clients will be 40% cheaper than the same call to a mobile from another company (e.g. TIM, AMX, TEM) and the pre-paid phone cards could be used in any kind of phone call.
The main aim of entering in the mobile is to protect its traffic/client base, because in the medium/long-term will happen a migration from fixed to mobile, however this migration in Brazil will be slower than in developed countries due to the low income level.
My perception is that the market is overeacting to this developments and the mobile operation will not be a serious cash drain, the company´s guidance is a 2% reduction in the Ebitda margin, from 42,6% (2Q04 data) to 40,6% . BMT´s management made very careful investments/acquisitions that always enhanced its competitive position, such as: MetroRed (data transmission) and GlobeNet (submarine cables), Vant (radio broadband) and I think that this time will not be different.
3) Acquisition of Telemig Celular (ticker ADR: TMB)
Opportunity is the controling shareholder of Telemig Celular, which is a mobile operation in the state of Minas Gerais. This state does not have a border with the concession area of BTM, therefore there is NO sinergies or a strategic reason for buying it, because is a stand alone operation faraway from BTM region. However, Telemig Celular is one of the best mobile operation in Brazil, is profitable and generates free cash flow. The investors worry about the possibility that BTM buys Telemig Celular, if it happens Opportunity is given ammunition to Telecom Italia/Pension Funds to sue him regarding the conflict of interest. However, Telemig Celular fits perfectly to two big mobile operators in the country: American Mobile (Telmex) and Vivo (TEM-Telefonica Moviles/Portugal Telecom), which don´t have an operation in the state of Minas Gerais.
4) Requires Patience
Most of the issues that are hindering the stock could go away in the middle of next year, such as: shareholder disputes are solved, and the first reported results for the mobile operation may calm down investors. In the last 52 weeks, BTM is the worst performer in the sector. I believe that most of the bad news are already in the price.
Investment Positives
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- Low leverage due to the high cash flow generation;
- Well entrenched position in the wireline business;
- Low capex for the wireline business in the next years, around
8% - 9% of net sales, because the company has already
accomplished the targets established by ANATEL (the Brasilian
regulatory agency);
- The mobile´s capex is low in comparison to cash flow;
- Excess cash could be paid as dividend or share buyback.
Catalyst
- Atractive valuation;
- Mobile operation performs well, better than the market expects;
- Resolution of shareholder disputes;
- Telemig Celular is purchased by a mobile operator (AMX or TEM);
- Share buyback/dividends.