Description

Stream of Consciousness Preamble:

This investment has clearly been a widow-maker, value-trap, caught falling knife or whatever else you want to call it, burning telecom and special sit investors, alike. With a continued decline in funds following special sits, Liberty, levered telecom and so many scarred in it, there’s clearly little appetite for it and while I am the posterchild for being burned here though I’ve had the luck of trading it moderately well, I hope I can convince some folks that it’s finally time to come back to LILAK.

The stock has declined to its lowest ever, even below the August 2020 when they announced a rights offering in COVID, mainly on the continued demise of everything that’s levered and not AI/Mag7 but also a delay in synergies from their acquisition of AT&T’s wireless business in Puerto Rico.

That said, the company gave mid-term guidance of greater than $1bln in aggregate free cash flow over the next three years (2024-2026) on what’s now a $1.3bln market cap with aggressive use of free cash flow to buy back stock (and natural deleveraging with mid-high single digit EBITDA growth).

The thesis is pretty simple here; assuming no catastrophic hurricanes, coups, riots, tidal waves, price wars across all markets (BIG IF), the high discount rate combined with significant free cash flow combined with low liquidity in the stock means a floor from the company’s buy back with upside from the massive free cash flow per share growth over the next few years in a ‘public LBO’.

Business Today

As a refresher, the business is currently as follows.

They have quad-plays in just about every market, are about 80% pegged to the USD and own a large subsea cable across the region.

Extend this chart out through 2024 and you see the stock at all-time lows of $6.50 despite significant progress made in cost-cutting in the CWC markets along with wireless asset integrations in Costa Rica and Puerto Rico.

Chile was once a bright spot in the thesis but increased competition in terrestrial caused a massive price war, highlighting the risk in owning a levered asset with zero marginal cost. Subsequently, LILAK merged its Chilean VTR business with AMX’s wireless business and lost almost all equity value as AMX could pump cash into the asset while LILAK couldn’t, further highlighting the risk in investing in a sub-scale, levered asset with zero marginal cost (as in, competitive race to the bottom in telco with overlapping footprints and low marginal cost to incremental subscriber).

Market by Market Summaries:

Puerto Rico – Cable monopoly with deal synergies/quad play from recent wireless acquisition. That said, the timing of achieving synergies has been pushed back which has created some weakness in the stock. LCPR is on a TSA agreement with AT&T as they migrate customers onto their own platforms in a transition period post-deal. They have focused their salespeople on migrations, realized higher handset equipment costs from migrating customers though have migrated 80% of customers. They also purchased Dish’s Boost subscriber base (and spectrum) in Puerto Rico to help scale. In 2H 2024, as they are fully off the AT&T TSA and have the flexibility of their own platforms and salesforce, they should fully realize synergies and grow wireless revenue/EBITDA.

Panama – Recent consolidation offers synergies along with expanded broadband footprint. The company has fully realized deal synergies in Panama ($70m), 90%+ of their network is FTTH and a shift away from prepaid mobile should help grow mobile revenue/subscribers.

Costa Rica – Mobile acquisition offers synergies and quad-play related growth opportunities. 40% of their footprint should be FTTH by YE and their quad-play offering is helping them grow mobile significantly.

Caribbean – Declining capital investment and growing broadband penetration across many islands offers LSD-MSD revenue/EBITDA growth, along with limited competition from a highly levered Digicel. The team has done a phenomenal job taking costs out of the segment while growing revenue and speaks to the quality of LILAK management, despite some hiccups elsewhere.

Undersea Fiber – Monopoly on undersea fiber throughout Caribbean (including to Miami, Mexico and South America); this business has grown revenue at an 8% CAGR over the last three years and should continue to grow at similar rates. At about a 60% EBITDA margin and less than 10% in capex percentage of revenue, this business generates significant free cash flow with growth.

Medium Term Free Cash Flow Guidance

The company issued medium-term free cash flow guidance on their earnings call of cumulatively greater than $1bln in 2024-2026. Using 3x 2023 free cash flow of $819m as a base and layering EBITDA growth, capex, cash taxes and refinancings allows us to gut check guidance. Assuming their MSD EBITDA guidance is 5-8%, 5% adds an incremental $500m in EBITDA (cumulatively over the 3-year period) while 8% adds an incremental $800m. Assuming $150-200m in incremental taxes (and little incremental capex), we get to $1.1bln-$1.4bln in free cash flow, all else equal.

One question is refinancing. See below for the debt structure but assuming they do not need to refinance at higher rates since they will naturally delever with EBITDA growth, based on my numbers, they should do just under $1.4bln in cumulative free cash flow before paying out minorities. As far as minorities go, they could potentially buy them out with cash on hand in the meantime or pay out $30-60m/year, so haircut free cash flow by 10-15%.

Valuation/Price Target

You can see from the numbers below that they should generate ~$2 in free cash flow per share in the next 12-18 months before buy backs and would generate $2-4/share with buybacks over the next three years, i.e. their entire market cap.

The other point of interest here is that the free float is likely about ~60% of market cap when you think of long-term holders, management/board/Malone, meaning they will likely hit some real liquidity issues on buybacks in the next year, much like SIRI has. This should help with keeping a floor on the stock from here.

Catalyst

Continued buy backs, hitting guidance and growth across markets