NII Holdings (NIHD) had two announcements yesterday morning. First it announced the permanent appointment of Steve Schindler as CEO and chairman, which we see as good news for shareholders. Steve has managed the turnaround of NIHD in a time efficient manner as the second announcement with 1Q earnings showed. NIHD reported 1Q 2013 results that some media outlets reported as a miss. The facts can be no further from the truth.
Let's recap why Schindler's role is a net-net positive for NIHD. Since he became interim CEO back in the fall of 2012, Steve has raised $910 million in new financing making both vendors and competitors confident and worried respectively. This also makes the anticipated sale of the tower sites in Brazil and Mexico easier as the creditworthiness of NIHD itself has been enhanced. The announced sale of Nextel Peru also has come in both earlier than anticipated by investors and at a higher price level than even we thought possible when we did our "bare bones" valuation here in SA earlier this year. Also, it is important to note that under Schindler, the company is more transparent than ever with information it shares with investors as demonstrated on its most recent earnings call, where it openly discussed the possible sale of additional tower assets not currently being offered sale and Nextel Chile and how it is strategically planning it to bring in the best possible price for the towers and spectrum rich operating territory. In addition, the company is changing its operating strategy in its engineering and maintenance procedures and going from an "outsource" arrangement with large vendors and going to an "in-source" strategy to have more control on the network performance and eventually lower operating cost. And lastly from the same earnings call, management sounds very energized in their mission of implementing the NIHD comeback story which clearly is happening faster than expected.
Now let's go to the earnings. All was well with early pre-market trading after the earnings announcement. What happened during the conference call created some confusion and presents investors with what we feel is a raging buying opportunity in NIHD. Here is a note from Wells Fargo who we think had the best clarification on the confusion regarding the perceived cash flow burn concern which was not properly addressed on the conference call:
NIHD: Addressing Cash Flow Concerns
Jennifer M. Fritzsche, Senior Analyst (312) 9203548
Sector Rating: International Wireless Carriers, Overweight
We believe there has been a good amount of confusion / questions / concern regarding NIHD's cash burn in the quarter and forward looking direction. Specifically, NIHD's net debt increased by ~ $490MM since yearend 2012. We believe there are two important factors to highlight which impacted Q1 cash burn trends which should not be replicated in Q2 and beyond. First, in Q1 the company upgraded its billing system in Brazil. This change delayed some the delivery of the invoices and thus collections to / from customers. In the company's 10Q, it specifically called this issue out and indicated it expects the collection of receivables in Brazil to decrease. We believe this issue impacted NIHD's cash burn by $200MM in Q1. According to NIHD management, it expects to recoup most of this in Q2. Separately, also impacting NIHD's cash burn in Q1 was the higher cash capx in the quarter. Specifically, cash capx was ~ $100MM higher than noncash capx. This is typical of Q1 when some of the capx not spent in Q4 and the spillover impact is seen in Q1. We do not expect this trend to continue in the remainder of 2013. In short, while NIHD has not offered guidance on cash burn for 2013, we continue to expect improvement of a few hundred million from 2012 levels (or ~ $1.3B).
It's important to note that Jennifer had and has maintained the price target range of $13-$15. That is nearly double the closing stock price of $7.44. We think the downward push yesterday came from short-sellers who are getting desperate on this name. Here is the latest short interest for NIHD from NASDAQ:
This shows both higher short interest and lower days to cover because the average daily volume has more than doubled. The 55,664,683 short interest is nearly a third of the entire float. In fact, NIHD is #13 in the absolute size of the shares short according our previous SA Instablog to a recent WSJ article:
Clearly, short sellers are aggressive on this name especially as the price increases. We think this is a recipe for disaster for the shorts as Schindler and his enthusiastic managers continue to execute their comeback plan.
We think there is a very cozy relationship between Google (GOOG) and NIHD as we have reported in our previous article "Another Nextel Is Hot And Google Is Helping". We see the Nextel Mexico subsidiary as something GOOG may have its eyes on. Why? With Google Fiber and Android plus Motorola, GOOG certainly shows an aspiration to become a full-fledged carrier. Also, Mexico is geographically convenient being adjacent to California and the license is valuable with 111 MHz of bandwidth, a rare amount of spectrum for any operator:
NIHD beat all expectations yesterday. Our previous target price of $12.11 is too conservative as many wall street analysts have higher targets than ours with the highest coming from Stifel currently at $23. We are raising our target to $13.13 given the new information we have that there are another 3500 towers owned by the company and not currently in our bare bones valuation. We put $175 million as a conservative value to these towers thereby adding $1.02 in value for NIHD shares.