Restructuring Will Position Latin American Telecoms For Future Success

Key Takeaways

• Restructuring and efficiency measures are enhancing cash flow and margins, positioning Millicom for improved earnings and net margin expansion.
  
• Strategic transactions and strong commercial performance, especially in B2B and customer net additions, indicate robust revenue and earnings growth potential.
  
• Increased competition in Guatemala and economic challenges in Bolivia and Colombia could impact revenue, profitability, and strategic growth efforts.

Catalysts

Provides cable and mobile services in Latin America.

• Millicom International Cellular is near completing its restructuring, which is expected to enhance equity free cash flow generation and improve EBITDA margins this year and beyond. This will likely impact earnings positively as significant cost reductions and CapEx optimization have been achieved.
  
• Strategic transactions in Colombia, Costa Rica, and a significant tower transaction in Central America are anticipated to close in 2025. These transactions are expected to boost the company's return on capital from 2026 onward, potentially impacting net margins positively.
  
• Record customer net additions in Q3 2024, driven by strong postpaid and home net adds, indicate a robust commercial strategy. This growth sets up for potential increases in service revenue and earnings in future quarters.
  
• Millicom's B2B business experienced organic revenue growth, particularly in digital solutions, with a focus on the SME customer segment. Continued growth in B2B, fueled by smart connectivity and cloud solutions, can bolster revenue growth in the future.
  
• Ongoing efficiency programs and a focused approach to network investment and commercial strategy suggest that margins will continue to improve. For instance, in Guatemala, despite market saturation, the company achieved record EBITDA margins, illustrating the effectiveness of operational strategies that could drive net margin expansion.

Millicom International Cellular Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Millicom International Cellular's revenue will grow by 2.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.7% today to 10.6% in 3 years time.
• Analysts expect earnings to reach $660.6 million (and earnings per share of $3.88) by about December 2027, up from $158.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $747.2 million in earnings, and the most bearish expecting $475.5 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.4x on those 2027 earnings, down from 27.0x today. This future PE is lower than the current PE for the GB Wireless Telecom industry at 12.9x.
• Analysts expect the number of shares outstanding to decline by 0.23% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.43%, as per the Simply Wall St company report.

Millicom International Cellular Future Earnings Per Share Growth

Risks

• Increased competitive pressure in Guatemala could impact service revenue and EBITDA margins, especially if competition leads to pricing pressure or loss of market share.
  
• Economic and currency challenges in Bolivia may result in devaluation, affecting the company’s revenue and potentially leading to increased costs denominated in other currencies.
  
• The regulatory and privatization process uncertainties related to the Colombian acquisitions may delay integration efforts, impacting projected synergies and future revenue growth.
  
• Execution challenges in merging Colombian entities or changes in regulatory environment may affect profitability and strategic planning, potentially delaying expected improvements in EBITDA margins.
  
• The ongoing restructuring, along with significant one-off charges and severance payments, might impact net margins in the short term, as these costs can fluctuate depending on operational needs.

Valuation

• The analysts have a consensus price target of $33.46 for Millicom International Cellular based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $38.0, and the most bearish reporting a price target of just $27.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $6.3 billion, earnings will come to $660.6 million, and it would be trading on a PE ratio of 10.4x, assuming you use a discount rate of 6.4%.
• Given the current share price of $24.84, the analyst's price target of $33.46 is 25.8% higher.
• 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.