Tag: European Market

Business Strategy and Outlook

After several years of restructuring, Millicom is now best thought of as a collection of investments in Latin American telecom businesses. It is likely for the firm to spend the next couple years primarily operating its businesses rather than reshaping its portfolio, allowing the firm to more clearly demonstrate its ability to generate cash flow. Millicom’s subsidiaries have provided wireless service in Guatemala, El Salvador, Honduras, Bolivia, and Paraguay since the early 1990s, giving it the largest market share in most of these countries. In addition to the wireless business, Millicom has invested heavily, both organically and through M&A, to build cable infrastructure, carving out solid market share in the fixed-line market as well—it is the internet access leader in Guatemala, Panama, Bolivia, Honduras, and Paraguay and the second largest in Colombia and El Salvador. Millicom can offer converged fixed-line and wireless services to nearly 13 million homes and businesses across a footprint that encompasses a population of about 120 million people. 

Favorable market structures following recent consolidation should also benefit Millicom. In Guatemala, which is now the firm’s most important market following the buyout of minority investors, it is the clear market leader and competes almost exclusively against America Movil. Other markets with only one substantial competitor include Panama, Honduras, Nicaragua, and Bolivia. Only Colombia, where Millicom is a distant third in the wireless market, presents an especially difficult competitive situation, but the firm has made progress gaining scale recently. Wireless penetration in these markets is already high, but data services still provide significant growth opportunities. Less than 55% of Millicom customers have a 4G LTE smartphone today, but this figure is up from 30% three years ago. Broadband penetration is also low in the countries Millicom serves at around 30%. As demand for high-quality connectivity grows, it is believed, Millicom’s financial performance will improve nicely in the coming years.

Financial Strength

Millicom historically carried below-average leverage, with a net debt around 1.0-2.0 times EBITDA. However, acquisitions and the buyout of minority investors in Guatemala has caused the debt load to swell. Net debt, including lease obligations, stood at $7.8 billion, or 3.4 times EBITDA, at the end of 2021. The firm expects to complete a $750 million equity rights offering during 2022 to fund a portion of the Guatemala transaction that will bring net leverage down to 3.0 times. Management has had a net leverage target of 2.0 times EBITDA since its portfolio reshuffling began in 2018 but hasn’t come close to that mark yet. Millicom cut its dividend to $1 per share from $2.64 in early 2020 and then eliminated the pay out entirely later in the year, saving about $265 million annually. While the 2.0 target remains a long-term goal, management expects leverage to decline to only about 2.5 times EBITDA by the end of 2025, with share repurchases resuming in 2023. By experts’ calculation, this target implies the firm could repurchase $1.5 billion of its shares over the next four years, or about 60% of its current market capitalization. It is favoured the firm take a more aggressive approach to reducing leverage given the volatility of the markets in which it operates. About 55% of the consolidated debt load and lease obligations sits at the individual operating subsidiaries, with Millicom guaranteeing less than 5% of these obligations. Most subsidiaries carry modest debt loads, most below 2 times net leverage. The businesses in Paraguay and Costa Rico are exceptions, with more than 3 times net leverage. Leverage in Panama is also elevated at 2.7 times EBITDA. At the parent level, Millicom had $3.8 billion in net debt outstanding at the end of 2021. The Guatemalan business subsequently issued $900 million of debt to fund part of the minority investor buyout, freeing up cash to repay parent-company obligations. The Guatemalan operation now carries net leverage of about 1.8 times.

Bulls Say’s

• Millicom holds strong wireless market share across nine Latin American countries with a combined population of nearly 120 million people and owns highquality cable networks that can provide broadband to 13 million homes and businesses in the region. 
• Broadband penetration remains low across the region and only about half the population owns a 4G smartphone, providing a long runway for growth. 
• Millicom should be able to improve its margins and cash flow as it grows its converged customer base.

Company Profile 

Millicom offers wireless and fixed-line telecom services primarily in smaller, less congested markets or in less developed countries in Latin America. Countries served include Bolivia (100% owned), Honduras (67%), Nicaragua (100%), Panama (80%), El Salvador (100%), Guatemala (100% following the buyout of minority partners in 2021), Paraguay (100%), Colombia (50%), and Costa Rica (100%). The firm’s fixed-line networks reach nearly 13 million homes and businesses while its wireless networks cover about 120 million people. Increasingly, Millicom offers a converged package that may include fixed-line phone, broadband, and pay television in conjunction with wireless services. The firm hopes to spin off portions of its tower business and mobile payments operation over the next couple years. 

(Source: MorningStar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Business Strategy & Outlook

Although the Associated British Foods’, or ABF’s, mass-apparel retail division– Primark–should deliver consistent growth through its expansion over the short term, supported by a reliable performance from the remaining largely commodified food divisions, the company’s potential will be limited over the long term by intense competition and a lack of differentiation, leading to the no-moat rating.

Primark delivered a strong performance over the decade preceding the pandemic and to return to healthy growth rates in the short term. Its business model, which calls for low prices, high volumes, and large stores that offer an enjoyable shopping experience has proven popular with consumers and is likely to fare well in a period of significant cost of living challenges. Over the longer term, however, to see a gradual decline in like-for-like growth rates, and operating margins falling short of pre-pandemic heights. To increased competition, stemming largely from emerging digital-only players, and declining footfall on high streets as more retailers close down stores will hurt Primark’s model given the lack of an online business. These dynamics, along with the smaller store format planned as part of the expansion stand to reduce, Primark’s sales densities and consequently its operating leverage.

In its food businesses, ABF enjoys strong market positions across sugar, ingredients, and animal feed, however, a lack of differentiation for the bulk of the portfolio translates into single-digit operating margins and limited growth opportunities. Despite that, there are some pockets of growth that management is right to explore, such as specialized animal nutrition and an expansion into adjacent markets for its products, such as the alternative meat space for the yeast extracts.

The grocery unit produces food and beverage brands with little pricing power that do not occupy center-stage positions in supermarkets. Growth has been lagging the market, and the segment’s operating margin is significantly lower than that of larger, competitively advantaged consumer goods firms (10% versus midteens).

Fair value and Profit Drivers

The fair value estimate for Associated British Foods is GBX 2,200. The valuation implies a five-year top-line compounded annual growth rate of 6.5%, higher in the near term as Primark rebounds from the COVID-19 disruption. The margins to recover to pre-pandemic levels by the fiscal year 2023, but the steady-state operating margin of 8.8% does not imply an upside to historical averages. The looming competition in the mass apparel space and a gradual deterioration of Primark’s best-in-class operating leverage will impact the retail segment’s margin and limit its contribution to the group’s operating profit to 58% by 2026, consistent with the pre-pandemic share, despite its superior growth prospects. An important driver of the valuation is the assumption regarding the speed of expansion for the Primark chain. Management is targeting a total of 530 stores by September 2026, which implies a significant step up in the average number of store openings to around 30 per year starting with the fiscal year 2023, from an average of 19 over the decade leading up to the pandemic. Although the plan features smaller stores across the US and Iberia, it is overly ambitious given previous guidance misses. As per forecast of 500 stores by 2026 assumes an approximately 20% lower store and floorspace net addition, consistent with the historical under delivery. In the sugar business, the ABF to gradually step- up production to approach 3.5 million metric tons by fiscal 2026. The cost efficiencies due to higher volume production and capacity utilization will partially compensate for lower sugar prices, but the unit’s operating margin should still stay below historical highs to a more sustainable 7% level by 2026, which would translate into a normalized contribution of 8% of the group’s operating profits. In the other segments (agriculture, ingredients, and grocery), the moderate top-line growth (1%-3.5%) and marginal profitability improvements in the ingredients and agriculture segments driven by mix tailwinds as management gradually reposition the portfolio towards faster-growing, margin accretive segments such as specialty animal feed and enzymes.

Bulls Say

• Primark is in the expansion phase and new store additions will likely drive earnings growth for years to come.

• Given Primark’s rock-bottom prices and management’s commitment to maintaining price leadership, the retailer is well-positioned to navigate periods of high inflation and appeal to cash-strapped consumers.

• ABF’s sugar segment is benefiting from Illovo’s strong profitability bedrock, the result of its growing downstream operations and strong regional and local market position.

Company Description

Associated British Foods is a diversified international retail, food, and ingredients group with 130,000 employees and operations in 50 countries across Europe, southern Africa, the Americas, Asia, and Australia. The group sells branded grocery products, grows and processes sugar, supplies farmers with crop input and animal feed, and runs the popular Primark clothing retail chain. It also supplies ingredients like bakers’ yeast, enzymes, lipids, and cereal specialties. Some 40% of sales are in the U.K., and Primark generates more than half of the firm’s operating profit.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.