AI And Cybersecurity Demand Will Drive Long Term Mexican Connectivity Expansion

Catalysts

About Axtel. de

Axtel. de provides digital infrastructure, connectivity and managed IT and cybersecurity services to enterprises, government entities and wholesale carriers across Mexico and cross border with the United States.

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

• Ongoing AI driven growth in hyperscaler and data center traffic between Mexico and the United States, supported by Axtel's multi year fiber expansion and next generation transport upgrades, is described by the company as a driver of Wholesale revenue growth and a higher margin mix, which in turn lifts consolidated EBITDA and earnings.
• Strengthening cross border trade flows between Mexico and Texas and broader nearshoring trends increase demand for secure, high capacity connectivity and IT services, supporting recurring Enterprise and Wholesale revenues and providing operating leverage to expand net margins.
• Rapid adoption of advanced cybersecurity and managed security services, underscored by recent regional awards and partnerships, is shifting the Enterprise revenue mix toward higher value, higher margin offerings, which supports resilient top line growth and improves consolidated EBITDA margin.
• Scaling AI and data management capabilities, including the new data and artificial intelligence division and strategic alliances for backup and data platforms, position Axtel to pursue more sophisticated IT and automation projects, deepening wallet share with large clients and supporting medium term revenue and EBITDA expansion.
• Disciplined deleveraging, with net debt already trending toward 2 times EBITDA and lower interest expense projected into 2026, is expected to reduce financing costs and enhance free cash flow, creating room for either accelerated strategic capex or future shareholder returns that support earnings per share.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Axtel. de's revenue will grow by 5.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.0% today to 6.4% in 3 years time.
• Analysts expect earnings to reach MX$926.8 million (and earnings per share of MX$0.34) by about December 2028, up from MX$623.8 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 14.6x on those 2028 earnings, up from 13.3x today. This future PE is lower than the current PE for the MX Telecom industry at 44.4x.
• 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 16.14%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The current double digit demand growth from hyperscalers, data centers and cross border traffic, supported by multi year fiber expansion and higher capacity transport upgrades, could translate into sustained revenue growth above market expectations. This would likely push earnings and the share price higher rather than remaining flat, primarily through faster Wholesale and Axnet revenue expansion and higher consolidated EBITDA.
• The company is already demonstrating operating leverage, with second quarter EBITDA growing faster than revenue as higher margin Wholesale and recurring Enterprise services scale. If this mix shift continues, net margins and earnings could rise meaningfully over the medium term, which could lead to an upward rerating of the share price.
• Disciplined deleveraging, including significant debt prepayments and a projected reduction in interest expense by more than twenty million dollars by 2026, increases free cash flow and creates capacity for either accelerated strategic capital expenditure or shareholder returns such as buybacks or dividends. Any of these outcomes could act as positive catalysts for the share price via higher earnings and improved equity value.
• The rapid build out of Axtel's AI and cybersecurity capabilities, evidenced by new dedicated AI divisions, strategic alliances in backup and data management and regional awards as a leading managed security provider, positions the company to capture structurally growing demand for advanced IT solutions. This may drive higher recurring revenue growth and structurally better EBITDA margins than currently implied in a flat share price view.
• Strengthening trade flows between Mexico and Texas, continued nearshoring and participation in large scale government digitalization projects, including Mexico's international trade processing platform, suggest that both Government and cross border Enterprise demand could stay elevated for years. This could potentially result in sustained revenue growth and expanding earnings that would contradict expectations for a stagnant share price.

Valuation

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

• The analysts have a consensus price target of MX$3.1 for Axtel. de based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be MX$14.4 billion, earnings will come to MX$926.8 million, and it would be trading on a PE ratio of 14.6x, assuming you use a discount rate of 16.1%.
  
• Given the current share price of MX$2.98, the analyst price target of MX$3.1 is 3.9% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.