We received and redacted names from this update from a large foreign bank who shall remain anonymous, but anyone in NII Holdings (NASDAQ:NIHD) will know who it is immediately. The short story on NIHD is starting to lose steam as the company continues to make good on raising cash and focusing the business in its two top markets, Mexico and Brazil. As they point out, the street seems to have misinterpreted the cap rate for the tower deal announced yesterday. Please note that this bank thinks the stock could be a double or triple under certain circumstances and has a target price of $10. Moreover, as we predicted, the short interest continues to rise as reported last night:
US$6.67 (at 20:00, Aug 08, 13 GMT)
Market Cap (m):
Current valuation (NYSE:DCF):
12mth price target:
· As a follow-up to our note earlier today, we are reviewing the math behind the quoted 8.8% cap rate on NIHD's sale lease-back of the Brazil and Mexico towers.
· After speaking with clients all morning, we understand there is some confusion surrounding American Tower's disclosure of $149m in annual rental revenue as a result of the transaction.
· $149m is the approximate year one lease payment made by NIHD, but this is not the number that should be used in the cap rate calculation. AMT will take over the ground rents and other costs of $94m (attained based on AMT's expected annual gross margin on the deal of $55m). The net effect to NIHD is $55m, and this is the number that should be used in a cap rate calculation.
· When incorporating escalators over a long-term period (50-years), NIHD management has indicated that the cap rate is ~8.8%. We note that this estimate is subject to change based on the escalators.
· As lease payments will be made in local currency, NIHD is effectively borrowing cheaply in local currency. As a comparison, NIHD's upsized USD-denominated May 2013 offering priced at 7.88%. In our opinion, the effective hedge against forex risk and the Brazil and Mexico tax shield is well worth the ~100bps higher interest rate.
Action and recommendation
· We continue to think that NIHD has a sufficient liquidity bridge to either an operational turnaround or a break-up over the next two to three years. While challenges are numerous, we think the potential upside for a double or triple on the equity merits a small long position for those investors that can handle the volatility.
Required valuation and risks
· Our US$10.00 price target for NIHD is based primarily on DCF analysis (assumes 11.6% WACC, 3.0% risk-free rate, 1.3 beta, 75% debt/capitalization, 2.0% perpetual growth) and is supported by valuation multiple analyses. Risks to our target price include election/regulation in Mexico, spectrum and competition in Brazil, and the lack of scale and potential difficulty in financing.
· Our US$86 target price for AMT is based on an EV/EBITDA multiple based on historical trading ranges and is supported by a DCF analysis. Risks include: inclusion in REIT index not occurring, ground lease capex larger than estimates, availability of deals, hedge fund ownership, interest rate sensitivity, inflation risk, and premium valuation.
EPS adj growth
Total div yield
*All values are in USD unless otherwise stated.
Source: Aug 2013.
NIHD US vs S&P 500, & rec history
Bottom line is the street saw the $149 million top line number in the press release on Friday, calculated a 18.3% cap rate, smelled trouble and sold the stock. Nothing could be further from the truth. The $149 number includes underlying costs of $94 million annually NIHD had for the towers without this transaction. The real number to use is $55 million which actually translates into a 6.8% cap rate for the $811 tower asset sale which is a very low cost of money given the high yield market comparison above of NIHD's latest financing at 7.7% especially in light of the offloading of currency risk to American Tower (NYSE:AMT). As the above analysis suggests, that may easily be worth another 1% reduction because there are no currency hedging risks. So we think the initial net cap rate is should be valued at 5.8% for the early years and then adjusts higher. We also think that management has been extremely conservative in its guidance of 8.8% estimate to the bank whose analysis we used for this article.
Disclosure: I am long NIHD.