I am updating my previous analysis for Millicom International Cellular (NASDAQ:TIGO) in advance of Q2 2024 earnings, which will be released pre-market on August 2nd. I previously rated Millicom a buy for the following reasons:
- The business was improving on multiple fronts, including profitability, its large operation in Colombia, and tower monetization.
- Cost restructuring was ahead of expectations.
- Based on updated guidance, DCF analysis suggested a price target of $20.50, which was a 14% upside.
Since my last analysis, Millicom has returned over 37%, while the S&P 500 has yielded 15%.
Millicom has had a great run with continuing growth in key businesses and impressive cost restructuring. I expect earnings to be strong and continue to reflect this performance. However, I believe that the market has recognized this value and over compensated, lifting Millicom well beyond its fair value.
With a price target of $21.80, up from my previous price target of $20.50 but 12% down from today, I lower my rating on Millicom from buy to sell.
Q2 Earnings Preview
Millicom is expected to announce EPS of $0.54, up $0.01 sequentially, and revenue of $1.48 billion, down $0.01 billion. For all intents and purposes, flat quarter-over-quarter, but up significantly year-on-year. In addition, revisions have been limited but are favorable, with 1 upward revision and no downward revisions.
Millicom management does not have a strong history of delivering consensus for EPS, with 1 beat and 7 misses due to volatile below the line items. Revenue doesn’t fare much better with 2 beats and 6 misses. Based on this, we should expect to come in at or slightly below consensus, but that will still be favorable year-on-year.
It is also worth noting that we are heading into what has historically been Millicom’s most challenging trading days from August through October, with 70-80% of trading days ending down historically.
As earnings come out, I will be looking for signs of equity-free cash flow being ahead of or behind the guidance. Based on management’s previous optimism, I have hedged back equity free cash flow for the year, so higher cash flow could result in a rating closer to hold (although lower cash flow could move towards strong sell).
Valuation
I updated my ongoing DCF analysis using current trends and aligning with management’s guidance. I made the following assumptions:
- Equity free cash flow delivered at 2/3 of guidance based on historical optimism and below the line volatility.
- Near-term revenue growth of 3% based on industry long-term growth expectations.
- Long-term growth of 2% based on Latin America telecom forecast.
- Discount rate of 10% based on the maturity of the telecom industry and cap size.
This DCF analysis yields a price target of $21.80, a 12% downside from today but up 6% from my previous price target.
The quant rating is still signaling a buy; however, I feel that momentum is outweighing this due to the rapid rise in share price. The remaining factors place this solidly in the hold to sell range.
Market Has Recognized Value
Millicom has been having a solid run with growth in service revenue across nearly every market and aggressive growth in profitability and cash flow from the Project Everest restructuring. This is a great accomplishment, and it has set up a solid and reliably cash-flowing business.
That said, I feel the market has overreacted to this strong performance and the price has now moved well past fair value. The current share price would require growth well beyond industry expectations. Keep in mind that once cost savings are annualized, profitability growth will slow significantly.
Fair value was reflected when billionaire Xavier Niel made an offer of $4.1 billion for Millicom. Management has not accepted or countered the offer as of this writing. This compares with a market cap of $4.2 billion. Recent telecom M&A deals have been at a 30-60% premium. At the low end, this would suggest a market cap of just north of $3 billion, or ~$20 per share. Of course, this was likely a lower initial offer, putting this solidly in the $20-23 range.
Upside Potential
There could be upside potential if an acquisition comes back north of the current share price, although management has not expressed an interest in selling at this range.
There could also be upside potential if equity free cash flow comes in above management expectations. That said, it is already quite a stretch rising from -$18 million to +$500 million, and I continue to believe the current guidance still parks the fair value below market price. With that in mind, equity free cash flow would need to be in the $600 million plus range or future growth expectations would have to increase for my price target to move upward and risk to mitigate.
Keep in mind that Millicom is still heavily exposed to interest rates and FX, which is a downside potential that needs to be considered against any upside.
Verdict
Millicom is on a roll of operational performance improvement, and I fully expect Q2 results to continue showing this benefit. The market has recognized the impressive turnaround and rewarded TIGO with a share price that I now feel is above fair market value. Quant rating is weakening, and a takeover offer is below the current market cap. In addition, management has historically been overoptimistic, so additional performance upside is unlikely as earnings are released.
With the above in mind, I lower my rating from buy to sell at a price target of $21.80. I will be closely monitoring equity free cash flow and any changes in guidance or growth expectations as earnings are released.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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