Millicom

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 2/5

Millicom (TIGO) is a leading provider of fixed and mobile telecommunications services in Latin America and Africa, providing mobile, data, cable, and broadband services to both consumers and businesses.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: Millicom, operating under the brand name TIGO, is focused on providing mobile, data, cable, and broadband services across Latin America and Africa. The company operates in markets characterized by lower broadband penetration than developed markets, presenting significant growth potential.

Revenue Distribution: TIGO’s revenue is primarily generated from mobile services, with a growing contribution from cable and broadband services. The revenue breakdown varies by region, but a key trend is a consistent decline in voice revenue, compensated by a rise in service and other revenue sources, especially in the mobile segment. Most of TIGO’s revenue is derived from its operations in Latin America, followed by Africa.

Industry Trends and Competitive Landscape: The telecommunications industry is undergoing rapid technological change, characterized by intense competition from both incumbent players and new entrants. The industry is seeing a shift from traditional voice revenue to data and internet services, with pricing pressures and heavy competition. Key trends include a focus on enhancing digital capabilities, expanding fiber optic networks, and improving 4G and 5G coverage in key regions. Companies are also looking to provide “convergence” services, or a bundled offering of different connectivity and content options. The competitive landscape varies from country to country, including major established players and new players looking for growth opportunities in under-penetrated areas.

What Makes TIGO Different:

  • Focus on Emerging Markets: TIGO primarily operates in Latin America and Africa, which are higher-growth but higher-risk markets compared to developed countries. This focus gives the company first-hand knowledge of these particular markets.
  • Integrated Services Approach: TIGO aims to deliver a mix of mobile, cable, and broadband services. The goal is to capture a larger share of the customer wallet and offset the decline in voice revenue through bundled offerings.

Moat Analysis:

Moat Rating: 2 / 5 TIGO does not appear to have a strong, well-defended moat, as the telecommunications industry is competitive and has relatively low barriers to entry.

  • Switching Costs: TIGO does have some level of switching costs, particularly for its post-paid customers, but they are not particularly high, considering the prevalence of prepaid services in its markets and the variety of other options customers have in their regions.
  • Intangible Assets: While TIGO has built a recognizable brand in Latin America and Africa, its brand is not a powerful enough moat to prevent customers from switching to other providers.
  • Network Effects: TIGO benefits from network effects in its mobile business, but those effects are not nearly as strong as with purely network-based companies, given the competition.
  • Cost Advantages: TIGO is often forced to compete on price due to competitive pressures, and the company does not have significant cost advantages that provide a large moat.

Legitimate Risks That Could Harm the Moat & Business Resilience:

  1. Intense Competition: Competition in telecommunications is fierce, and new entrants often disrupt the market by offering lower prices or innovative services. This erodes TIGO’s pricing power. The pressure of the competition can also create the need for significant capital expenditure to keep up in terms of speeds and quality of their service, which increases the cost of providing their service.
  2. Regulatory Uncertainty: TIGO operates in multiple countries with varying and often unpredictable regulations which can impact its operations and profitability negatively, whether in its day-to-day operations, its licensing, or the taxation of its services.
  3. Technological Change: The rapid pace of technological innovation (e.g., 5G) requires substantial investment for infrastructure and upgrades, placing financial pressure on TIGO to keep its technologies up to date. Changes in technology, such as shifting consumption patterns, can mean that TIGO has to change its strategy to remain relevant and profitable.
  4. Macroeconomic instability: TIGO operates in emerging markets that can be exposed to currency fluctuations, inflation, economic shocks, and political instability, which can reduce demand for services and increase operating costs.
  5. Cybersecurity and Data Protection: Cyberattacks and data breaches can disrupt its operations and damage customer trust, making cybersecurity a priority with heavy implications for both finances and its reputation. The increasing scrutiny on customer data privacy means that companies must maintain strict data protections, which will impose costs on TIGO.

Business Resilience:

*TIGO does show resilience by having a well-diversified geographic profile, although this will also expose it to more risks. Also, its focus on mobile and internet services does show long term opportunities, as those sectors are experiencing growth. The company also shows some resilience through its focus on digital services, and the company’s focus on B2B and business customers should help stabilize revenue and growth over the long-term. Despite that, it’s still susceptible to the risk mentioned above, and also from the fact that it’s operating in emerging countries, which makes it more risky than for a similar company based in Europe and the U.S.

Financial Overview:

  • Revenue: In the latest FY (2022) TIGO’s revenue was $5.261 billion, which showed growth of 3.2% over 2021
  • EBITDA: In FY 2022, TIGO’s EBITDA was $2.04 billion, up 1.9% over the prior year.
    • Operating profit: The operating profit for FY 2022 was $733 million, down from $1.386 billion of FY 2021. This was mainly due to a higher depreciation and amortization, related mostly to the depreciation of its network, and a huge $462 million impairment in good will.
    • Net Profit: The net profit for FY 2022 was a loss of $243 million, down from $543 million of profits in FY 2021.
  • Free Cash Flow: Total free cash flow for FY 2022 was $1.158 million, an almost 28% decline from the prior year due to a dip in operational profitability and an increase in capital expenditures. The main components of CapEx were on infrastructure including towers and FTTx rollout.
    • Capital Expenditures: In 2022 were $1.322 billion, up by 5.1% from 2021 ($1.258 billion), representing a CapEx-to-revenues ratio of around 25%. The company has focused on network investments, including 4G, 5G, cable and fiber rollout.

Balance Sheet

  • Total assets: total assets for FY 2022 were $16.166 billion,
  • Total liabilities: Total liabilities were at $11.948 billion in FY 2022, and showed a substantial increase in the year to due increasing debt. The debt was mainly in the form of bonds and financial loans.
    • Net Debt: The company’s net debt was $5.782 billion in FY 2022, showing a rise in leverage for the company
  • Shareholder equity: Shareholder equity was at $4.166 in FY 2022.
  • Gearing ratio (Net Debt/EBITDA): At the end of FY22 the gearing ratio was at 3.3x
    • The Net Debt/EBITDA ratio is an important factor in measuring TIGO’s stability, as it shows how much of its debt it can cover with its EBITDA (earnings before interest, taxes, depreciation, and amortization). A higher gearing ratio would mean that the company has less financial flexibility and needs to be analyzed by looking at their ability to repay debt and generate good profits.

Financial Strengths and Weaknesses

  • Strengths: The company’s revenue continues to grow, despite the decline in traditional voice revenue. The subscriber base is also growing. The company has strong cash flow in certain markets.
  • Weaknesses: However, The company’s high financial expenses are concerning, combined with the high level of overall debt. The cash burn is also concerning, especially since a high percentage of the CAPEX is for growth. In conclusion, the company’s profitability isn’t at a desired level. The company needs to balance its profitability with further growth.

Understandability: Understandability: 3 / 5

TIGO is a relatively easy-to-understand business that provides mobile, broadband, and cable services, however, the specific competitive factors and risks of their regions require some industry and economic understanding, making it a three for understandability. The complexity is mainly due to its wide geographic footprint across very different countries, with different market drivers and regulatory requirements, which can be difficult for a non-specialist to grasp.

Balance Sheet Health Balance Sheet Health: 2 / 5

The latest financial information shows the increasing debt levels at the company, while the profitability is struggling. The higher debt levels also have an impact on the company’s ratios, like the gearing ratio. The company’s high capital requirements, in addition to higher interest rates, means that their risk factors are increasing.

Recent Issues, Concerns, and Management’s Response

  • Financial Impact of Acquisitions: TIGO has made some acquisitions recently, but these have added large sums of goodwill to their balance sheet and have not yet created a significant value. The company also needs to take care and integrate the new acquisitions properly.
  • Impact of macro environment The high inflation rates in some of the regions that TIGO operates in has increased uncertainty and poses a risk to their business. The company has also had high debt and is vulnerable to changes in interest rates. In the Q4 earnings report they mentioned that they expect the increased interest rates to affect their earnings in 2023 and 2024. In addition, currency fluctuations in their markets can negatively impact their revenue and profitability.
  • Competition: TIGO has many competitors in its regions, including both established players and newcomers, leading to more aggressive price competition and margin declines.
  • Management Response: TIGO’s management has acknowledged the above issues, and have made them a priority. Management intends to focus on improving the operational performance of the business, cut cost, and prioritize capital spending. The management has also reiterated their focus on growth and long term value creation.