Fiber Migration And Slowing Broadband Penetration Will Pressure Long Term Earnings Outlook

Catalysts

About Megacable Holdings S. A. B. de C. V

Megacable Holdings S. A. B. de C. V operates telecommunications networks in Mexico, offering broadband, video, telephony and related connectivity services.

What are the underlying business or industry changes driving this perspective?

• As broadband penetration in Mexico approaches saturation and Megacable already serves more than 80 percent of homes in its footprint, the runway for organic subscriber additions is likely to shrink materially. This may pressure future top line growth once expansion territories mature and could reduce the pace of revenue increases.
• The aggressive migration to fiber and prior build out that doubled homes passed means most heavy investment has already been spent. As competitors continue deploying similar infrastructure, future differentiation on network quality versus peers could narrow, which may limit pricing power and constrain ARPU growth and EBITDA margin expansion.
• Intensifying competition from national players investing heavily in fiber and convergent bundles is likely to keep the market highly price sensitive. This may force Megacable to rely on promotions and low cost offers to defend share, which can dilute ARPU and compress net margins even if subscriber counts continue to rise.
• The shift in the corporate segment from upfront equipment sales toward managed services extends revenue recognition over longer contracts in a market facing lower connectivity prices. This may cap near to medium term revenue growth and delay earnings contributions from this business line.
• With CapEx intensity guided to decline and free cash flow expected to turn structurally positive, the company may face fewer high returning internal reinvestment opportunities in a slower growth environment. As a result, capital allocation may become more dependent on dividends or financial engineering that adds little to long term earnings growth.

Assumptions

This narrative explores a more pessimistic perspective on Megacable Holdings S. A. B. de C. V compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Megacable Holdings S. A. B. de C. V's revenue will grow by 6.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 7.3% today to 12.4% in 3 years time.
• The bearish analysts expect earnings to reach MX$5.2 billion (and earnings per share of MX$5.91) by about December 2028, up from MX$2.5 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as MX$8.0 billion.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 11.3x on those 2028 earnings, down from 17.4x today. This future PE is lower than the current PE for the MX Media industry at 17.4x.
• The bearish analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.98%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The company is still posting high single digit to double digit growth in its core mass market segment, with total revenues up 9 percent year over year and Internet, video and telephony subscribers all growing above market. This could support sustained revenue and earnings expansion rather than a share price decline.
• CapEx intensity is on a clear downward trend toward the low twenties as a percentage of revenue, and a largely completed fiber build reduces maintenance costs. This can lift free cash flow and improve net margins, supporting higher equity valuations over the long term.
• Megacable maintains one of the strongest balance sheets in the industry with low leverage, strong interest coverage and AAA local credit ratings. This gives it flexibility to fund new growth initiatives in areas like IT services and edge data, potentially driving higher long term earnings.
• Ongoing fiber migration, improving Net Promoter Scores and low churn relative to the competitive market suggest a strengthening competitive position. This can support continued ARPU growth and EBITDA margin expansion instead of the anticipated margin compression.
• The strategic shift in the corporate segment from one off equipment sales to recurring managed services, although a short term drag, is designed to create a more stable and higher quality revenue base over time. This could underpin more resilient earnings and challenge expectations of a weaker long term outlook.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Megacable Holdings S. A. B. de C. V is MX$45.0, which represents up to two standard deviations below the consensus price target of MX$66.92. This valuation is based on what can be assumed as the expectations of Megacable Holdings S. A. B. de C. V's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of MX$84.0, and the most bearish reporting a price target of just MX$45.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be MX$41.8 billion, earnings will come to MX$5.2 billion, and it would be trading on a PE ratio of 11.3x, assuming you use a discount rate of 15.0%.
  
• Given the current share price of MX$51.47, the analyst price target of MX$45.0 is 14.4% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.