Millicom (NASDAQ:TIGO) is introducing new products like Tigo Money and investment analysts expect stable free cash flow. If TIGO grows its mobile data services as promised, revenue growth is likely to increase. In my view, as soon as TIGO goes down As its leverage increases, and management begins a new buyback program, the stock price may rise. Considering the risks from regulators, my DCF model suggests a significantly higher value than the current price mark.
Millicom and Tigo Money
TIGO offers cable and mobile services in emerging markets. Options include high-speed data, cable TV, direct-to-home satellite TV and mobile voice.
The company’s most relevant revenue comes from mobile services to consumers, although home services and B2B also represent a large portion of net sales. In terms of geographic diversification, I believe investors like TIGO. The company provides services in many Latin American countries.
Regarding the company’s diversified model, there is one initiative that interests me quite a bit. Tigo Money, which offers merchant platforms, lending platforms and cards, is reporting 17% more customers. In my view, if Millicom can successfully offer these new services to its existing customers, revenue growth will trend higher.
TIGO has proven that it is willing to acquire businesses to enter new markets. This is very beneficial because the sales growth can be even bigger. I don’t expect many new acquisitions in 2022 as net debt/EBITDA levels are quite high right now. TIGO reported leverage of more than 3x. With that said, as the company grows and leverage decreases, we may see more acquisitions.
With an asset/liability ratio close to 1x and $776 million in cash, I believe the company’s financial situation is fairly stable.
The total loan amount does not seem small. As of June 30, 2022, net debt equaled $6.08 billion. If we assume 2023 EBITDA of $2.3 billion, the net debt/EBITDA stands close to 2.5x-3.5x. The company promised to reduce its leverage over time, so I’m not worried about the current debt amount.
Analysts expect sales growth and I’ve got a fair price of $41 per share
Investment analysts believe TIGO could report a decline in sales growth of -12% in 2022, with average sales growth closer to 4% from 2021 to 2024. Analysts believe EBITDA margin could be closer to 40% and operating margin to 19%. Occurs in 2024.
Moreover, among the initiatives outlined at the Investor Day, there are some noteworthy facts. First, TIGO expects to generate free cash flow of close to $0.8-$1 billion, reduce leverage and start share repurchases starting in 2023. With all this in mind, I believe investors may want to know more about TIGO’s valuation.
With more data networks and more mobile data expansion, I believe TIGO could sell for $41 per share.
In my view, if TIGO successfully grows its mobile data services and the customer base grows, the revenue will turn northward. Furthermore, further projects with business customers are likely. These initiatives were depicted in the last annual report:
Our strategic priorities include expansion of our high-speed data networks (4G, HFC and FTTH), facilitating growth in our mobile data and cable segments, implementation of technology transformation plans to improve our operational performance and efficiency. Source: 20-F
Furthermore, the company intends to separate Tigo Money, which will provide greater visibility to this new business segment. Millicom may receive additional financing if the company presents independent figures for TIGO funding from its telecommunications services operations.
Formation of legal entities to separate our Tigo Money and Towers businesses from our telecommunications services operations. Source: 20-F
According to my own estimates, with an EBITDA margin of 40%, an operating margin of 18% and an effective tax of 22%, I’ve got a 2026 NOPAT of $967 million. I believe my numbers are conservative and realistic.
If we subtract changes in working capital with -1.75% sales and a 21% capex/sales WK/sales ratio, 2023 FCF will be $810 million.
According to Seeking Alpha, the sector is trading at 8x EBITDA. However, TIGO trades close to 4.51x, so I used an exit multiple of 4.5x. With a discount of 6.6% and net debt of $6.08 billion, the implied price would be $41. Internal Revenue appears more optimistic at 44%.
VoIP technology, failed investments and licensing could bring the stock price to $9.5
In its last annual report, TIGO reported that the eventual increase in demand for voice over Internet Protocol services could hurt TIGO’s finances. If customers decide to use the telephone less, but use the Internet more, TIGO will see its free cash flow decline. The following lines provide more information about this risk:
The growth of Internet connectivity has led to the proliferation of voice over Internet Protocol services and video content services delivered over the Internet. Such operators may relocate the services we provide using our customers’ Internet access to enable us to provide communication, entertainment and information services directly to our customers. Failure to transform to data-driven products could negatively impact our legacy services and affect our results from operations. Source: 20-F
TIGO makes substantial investments in new technologies with the objective of generating free cash flow growth. In this scenario, I hypothesized that some of the new investments may go wrong or customers may not demand the company’s new technologies. As a result, future EBITDA margins may not be as large as expected and some investors may sell some shares.
If we are required to implement new technologies that do not generate sufficient revenue, our profitability and ability to generate cash flow will be negatively affected, and we may be required to scale back our investments or delay the implementation of new technologies. negatively impact our growth and ability to attract and retain customers. Source: 20-F
TIGO needs to renew some of its licenses from 2022 to 2026. If regulators decide not to sign new contracts with Millicom, I expect a significant decline in revenue growth and free cash flows. If a sufficient number of equity researchers observe a decline in profitability, the stock price will fall:
Our mobile telecommunications licenses in Paraguay (2022 and 2023), Nicaragua (2023) and Colombia (2023) are licenses expiring in the medium to near term. In El Salvador, we are in the process of renewing some parts of the 3.5 GHz band with local coverage (not national), which expires in 2018-2020. However, the regulator has shown interest in reorganizing the band to prepare for an auction for spectrum with national coverage in the second half of 2022. Other parts of the 3.5 GHz band will expire during 2026 and 2027. Source: 20-F
Let’s also mention that TIGO operates a business model that is subject to a significant amount of scrutiny from governments. If the company does not comply with laws and regulators, we can expect fines or disputes. New acquisitions require the approval of governments in certain jurisdictions:
Licensing, construction, ownership and operation of mobile telephone, broadband and cable TV networks, and the grant, maintenance and renewal of required licenses or permits, as well as radio frequency allocations and interconnection arrangements are regulated by national, state, regional. or local government authorities in the markets in which we operate, which could lead to disputes with government regulators. Source: 20-F
Considering the previous figures, I pictured a scenario of a large increase in working capital, a decline in sales growth, a small operating margin and a lot of capital expenditure. In the past, I have seen sales growth of -40%, a maximum capex/sales ratio of 23%, a minimum operating margin of 10%, and a 2% change in working capital/sales. I used these figures for my financial model.
My revenue growth includes 2026 revenue of $3.9 billion and 2026 non-operating profit after tax of $310 million. Sales growth from 2025 to 2026 remains at 4% y/y, which I believe is quite conservative.
With declining free cash flow, an exit EV/EBITDA of 4.5x and a share count of 171 million, the implied price remains close to $9.5. Note that I’m assuming net debt of $6.08 billion, which was given by management in a recent presentation.
TIGO reports a geographically diversified business model and management is introducing products like Tigo Money. Investment analysts and the company expect revenue growth and decent profitability margins. Considering that TIGO may announce a buyback program in 2023 and leverage may decrease, in my view, the stock price is too small. Under a simple DCF model, with conservative sales growth, the fair price could stand near $41 per share. This is significantly higher than the current stock price.