Description

Thesis

Sitios Latinamérica (“LASITE”) is a levered growth company with a solid outlook for growth and stability, at a modest valuation.  Both classic spin-off and geographic mismatch dynamics seem to be at play with large-cap parent company America Movil (AMX) spinning off this small-cap (approx. US$1.2 billion market cap) cellular tower business listed in Mexico but with its assets based everywhere in Latin America except for Mexico. We believe America Movil investors (many of which are based in the US) who received Mexico-listed LASITE shares in the spin-off have been selling their shares (LASITE is 1/70^th the size of AMX), creating an attractive entry point.

The company is the second largest tower company in Latin America and was spun out in late ’22.  Over the next 3-to-5 years, organic HSD EBITDA growth driven by new tower construction and colocations coupled with modest multiple expansion should lead to a doubling or tripling of the stock. Downside is protected by 10-year inflation-adjusted contracts with investment-grade customers and long-term debt that doesn’t mature until 2027-2032. 

Business Description

Sitios Latinoamérica is the second largest cellular tower company in Latin America with ~29k towers spread across 15 countries. The largest geographic concentration is Brazil (39% of sites / 46% of rev), followed by Argentina (14%/11%), Chile (9%/11%), Guatemala (10%/8%), and Ecuador (8%/7%). Central America collectively is 24%.  All subsidiaries are fully owned other than the Brazilian entity, of which America Movil retains 13%.  

Towers are generally fantastic businesses and LASITE is no exception.  The business model is simple; LASITE owns steel towers and rents space for mobile network operators to place antennae and other equipment under 10-year recurring revenue contracts with inflation-based escalators.  Nearly all other costs (such as ground lease expenses, etc.) are passed through to the customer, providing a high-margin stream of predictable and resilient cash flows to the tower company. While we generally eschew businesses with high leverage, we think LASITE’s debt level (5.4x ND/EBITDA) is appropriate given the unusually stable business model, long-term contracts with escalators, and strong growth profile.

Towers can generally hold up to 3 separate “tenants”, allowing the tower company to increase revenues with negligible additional cost via “colocation”.  LASITE’s “tenancy ratio” is 1.2x with former parent company America Movil being the dominant customer, though as a newly independent company LASITE appears primed to pursue the market for colocations from other customers aggressively given the significant demand increase for data in these markets.

Competitive intensity amongst tower companies is also generally restrained as local economies of scale and switching costs create an oligopolistic industry structure. Across Latin America, American Tower is the leader with ~31% of the independent towers in the region. LASITE is #2 and claims market leadership in 7 countries.  SBA Communications, Phoenix Tower, and IHS Tower are also present in certain markets.

46% of revenues are contracted in BRL, 43% in USD, and 11% in the Chilean Unidades de Fomento.

Growth Outlook

LASITE revenue will grow from 3 sources in the HSD+ over the next several years.  The first two are driven by mobile network operators’ need to keep up with unrelenting growth in mobile data traffic:

1. New tower construction: LASITE is targeting 1500-1800 new towers in 2023 (~5% of total), completely financed from internal cash flows. While Q1 was seasonally weak, even approaching those levels would provide a solid contribution to annual growth. LASITE targets returns on investment for the initial tenant of 8% above inflation for USD contracts and 14% above inflation for other currencies. Returns on investment are much higher if a second or third tenant are added to the tower.
2. Colocations: The best way to grow, but difficult to put a precise number. American and European tower operators have experienced ~3%+ annual growth from colocations for many years. America Movil’s other spun-out Mexican tower company Telesites (where the LASITE CEO previously served) experienced tenant growth from colocations of ~4% annually over the past 6 years despite a market structure with a dominant near-monopoly customer. LASITE is in an easier position to gain colocations than Telesites due to the structure of the telecom providers in the markets that LASITE service.
3. Pricing escalators: USD contracts are adjusted annually for US CPI, while Brazilian and Chilean contracts are adjusted for local inflation rates. Due to the leverage on the balance sheet, these inflation escalators can be extremely value-generating to equity holders as they accelerate deleveraging.

Financials and valuation

LASITE trades at ~7.4x EV/EBITDA, very cheap for a tower company (Telesites trades at 9x EBITDA and itself looks very cheap vs. developed-country tower cos that trade in the 15x-20x range and are growing slower).  While FCF is currently all being consumed by growth capex, on a “maintenance” basis the company’s FCF yield is nearly 10% NTM and ~15% on 2026. That is far too high for a business as resilient and with such strong long-term growth drivers as LASITE.

In our base case we expect LASITE to grow EBITDA at ~8%/yr and as the company establishes a track record of independent operations and reporting, to trade to at least Telesites’ 9x EBITDA by YE2025, which we view as a conservative multiple.  This implies an MXN ~22/sh stock price, more than triple the current market price.



Risks

• Customer concentration – similar to its peer Telesites, the vast majority of revenues are from former parent company America Movil. Telesites has had no adverse impact from this relationship over the last 7 years since it was spun out and we believe the family which has controlling interests in all 3 companies is incentivized to prefer profits at the towercos rather than at America Movil due to regulatory scrutiny of the consumer facing business as well as a lower multiple.
• Brazilian MNO consolidation – incumbent telco Oi (16% of Brazil’s total subs) declared bankruptcy in 2016 and its assets are being split amongst the remaining players. Due to low exposure to Oi, we estimate minimal impact to LASITE.
• Management disclosure / Capital allocation – while disclosure has so far been relatively weak at LASITE, we take comfort that over the past 7 years while under the current LASITE CEO’s oversight, Telesites’ EBITDA and FCF have exploded and the company converted to a REIT structure and initiated both a regular dividend and share buybacks. Management has indicated that over time LASITE will look to initiate a capital return program.
• BRL depreciation – LASITE currently has a material amount of MXN-denominated debt and BRL-denominated assets (the majority of debt is in USD and the majority of assets are also in USD). While a depreciation of the BRL (relative to MXN or USD) could reduce our equity’s intrinsic value, the company is currently moving to refinance its MXN debt into BRL to avoid an asset/liability mismatch. Additionally, the company’s inflation escalator and the fund’s other long-MXN exposures help mitigate potential value loss from such fluctuations. (Note that LASITE reports in MXN, so MXN appreciation vs. USD causes revenues to optically fall even though MXN/BRL and USD/BRL are the pairs that have actual economic impact on equity holders.)

Catalyst

-Analyst coverage
-Strong fundamental performance and tenancy ratio increase
-Capital return (buybacks and/or dividends)
-Grupo Carso (Carlos Slim) keeps buying more