Millicom: A Great Investment in Uncertain Times

Mar.11.09 | About: Millicom International (MIICF)

Millicom (MICC) is mainly a provider of mobile-telephony in third world countries (in total 16 countries); with a revenue-growth of 30% in the fourth quarter, it now has an market cap representing about a p/e of 10 for 2008 (46.72USD per share). The company showed an impressive EBITDA-margin in the last quarter of 45%. They have a net debt of about $1.5B, which holds a 1:1 ratio to full-year EBITDA-profit. Steps haven been taken to avoid revenue-loss from swings in currencies, however q4 revenue was hurt by 3% from currency depreciation.

Today, most of the growth in the company comes from Africa, where some countries have a growth of almost 100%; second is Asia with growth rates of around 70%. Apparently growth is slowing down somewhat in Central and South America, but it is still at about 20-30% (being also the largest market for Millicom).

Everything is looking pretty good so far; the only trouble that Millicom has really had is from countries that have taken the license away and basically just shut the company out of the country; it's very hard for me to judge whether this will happen again, but it definitely is somewhat of a wild card here. Other than this there are a bunch of other companies competing with Millicom, which in the long run should push down margins. And another 'problem' is that the impressive growth of Millicom has been created by constantly investing all the profit into new infrastructure, so dividends are not in the pipe-line for a long time, I would guess.

The key here to be able to decide whether to buy or not is to know what the economic outlook really is for the countries where Millicom is active. If the global economy was no issue then Millicom would probably be valued at a p/e of 20 right now. Considering the great uncertainties of where we're headed, let's just see what the worst that could happen in these third world countries really is.

The greatest danger lies in Central and South America, where the penetration of subscribers is a lot higher than in other countries, where competition is harder and where the economies are much closer to the global economy and of course the US. Latin American economies are fairly dependent on production of natural resources for export, so this would be a big problem if prices keep dropping. But, even if the exports basically come to a halt, people will still want to call each other. I suppose that a drop of something like 50% of revenues here is not impossible, but it's a long way there and I think that if things start to get bad in these countries you will be able to pull out before any great losses would be had. In the other countries, I would say that the greatest risk is actually political, and that's something that you simply can't predict.

To conclude, I think that Millicom is a great investment in these uncertain times - you get out of uncertain currencies, you get out of (historically) highly priced gold and you get out of the countries that can fall the hardest. It would take a lot to bring down Millicom in these times. We shouldn't overlook the possibility of them being bought out either, as this is something that was being discussed when they were valued much higher...

Disclosure: no positions