Friday, September 2, 2016

LiLAC (LILA/B/K) - Liberty LatAm - 287 slides [09/02/2016]

Link to slide deck: LiLAC - September 2016 (Click left)

This presentation is long on purpose, as not much is written about the specific markets that LiLAC is in, but rather "broadband penetration is lower in LatAm, Malone indirectly bought more of LiLAC through the C&W purchase, LBTYA management keeps touting the fragmented market and large M&A opportunity, etc.

I did not organize this to be in a stock pitching contest, so don't expect it to be short and sweet and me to sell you on buying LiLAC immediately. Some of it may be long-winded, some repetitive, some unnecessary. Scroll through sections or areas that me be or interest, feel free to reach out with any questions or comments.

The stock is not quite dirt cheap, even despite the share decline. However, at ~$28.50/share, I think LILA represents an decently attractive opportunity, due to:

  • Newbuild opportunity and progress in Chile (VTR)
  • Improving mobile networks across legacy Cable & Wireless footprint to meet data growth
  • Data growth will result in increased fixed broadband growth
  • Fixed-mobile divergence in Cable & Wireless footprint will drive penetration, ARPU, bundling, and lower cost to carry data traffic
  • Submarine cable assets will be tremendous competitive advantage as Latin America continues to experience strong mobile/fixed data traffic growth, as the Cable & Wireless sub-sea assets are the most comprehensive in the region, continue to be top ranked year-in, year-out
  • Synergy targets - both on operating costs and through capital reductions - will improve FCF
  • Levered Equity returns: minimal 2016 free cash flow will lead to likely zero shares being repurchases; however, 2017+ will introduce the levered-equity returns many Malone followers know of


There are some risks, but overall, I think it is difficult to lose money at current pricing over the next ~3+ years, and there are a number of levers LiLAC can pull to bring strong returns on investment






22 comments:

  1. Thanks for the deck - great work here and very much appreciated.

    Quick question on CWC - I've been trying to model everything myself and found some weird discrepancies between CWC's historical operational metrics and the figures that appear on Liberty Global latest fixed income filing (.

    For example, the fixed income filing shows that as of June 30, 2015 (a year ago) CWC had 427.7k video subs, 587.7k internet subs and 785.2k fixed telephone subs - so in total we have 1.8m RGUs (excluding mobile). When compared with June 30, 2016 1.88m reported RGUs you have a nice 4.4% growth - not bad. however, if you look at CWC's trading update from a year ago, the numbers are completely different: 458k video, 665k internet & 1,128k fixed line - total of 2,251k (again, excluding mobile). That's a whooping 25% difference which I just can't reconcile - what am I missing?

    here are the links to both documents:
    CWC trading update: http://cwc.com/live/assets/uploads/files/IR/Results%20Announcements/CWC-Q1-2015_16-Trading-Update.pdf
    LG fixed income filing (page 34): http://www.libertyglobal.com/pdf/fixed-income/CW-Fixed-Income-Q2-2016-Report-FINAL.pdf

    Also, here's the Liberty announcement on closing the CWC deal - subscribers numbers there are pretty similar to what CWC reported in the past, and far higher than what Liberty itself will report for CWC a couple of months later: https://www.libertyglobal.com/pdf/press-release/05-16-Closing-CWC-Acquisition-FINAL.pdf

    I know management mentioned some accounting issues in the process of integrating CWC & LiLAC, but RGU count has nothing to do with IFRS / US GAAP as far as I can tell.

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    1. To try to answer your question, I will refer to the Q1/2016 and Q2/2016 fixed income filings for Cable & Wireless. In Q1/2016, you will see that C&W had a total of 2.306 million RGUs. However, almost as a warning, LiLAC stated in the footnotes (see note 5) that:

      "Subscriber statistics for Liberty Global (including the LiLAC Group) and CWC are as of March 31, 2016, and are based on each entity's subscriber counting policies. CWC’s subscriber counting policies may differ from those of Liberty Global. Accordingly, the CWC and combined subscriber statistics are not necessarily indicative of the actual number of subscribers to be reported by CWC or the combined operations once CWC conforms to Liberty Global's subscriber counting policies."

      Fast forward to Q2/2016 and the RGUs show a large decrease Q/Q, going from 2.3 million to 1.882 million. Again, the footnotes likely explain the reason. If you go to the last page of the fixed income filing, under "Additional General Notes" it says "that SOHO customers of CWC are not included in the LiLAC respective RGU and customer counts as of June 30, 2016. With the exception of our B2B SOHO subscribers, we generally do not count customers of B2B services as customers or RGUs for external reporting purposes." This may be the reason...

      Lastly, they ended the fixed income filing with "Subscriber information for acquired entities, including CWC, is preliminary and subject to adjustment until we have completed our review of such information and determined that it is presented in accordance with our policies."

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  2. Thanks for the clarification, I guess this must've messed up plenty of sell-side models and helped pushing the stock further down.

    I guess the story around LiLAC now is basically those CWC assets that were supposed to be the faster-growing ones of the group (due to Columbus), but will probably contract by 1%-2% or be flat for 2016. Whether or not that is a one-time thing or a change in trajectory will be critical for the investment thesis here.

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  3. Thank you Value Seeker for this incredibly detailed look at LiLAC. You used many sources in your research. How long did you work on this deck?

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    1. Thank you. It took me about a week to put together, all in. However, I follow LILA and knew where to look for most of the information. It was just throwing it all together. In my opinion, the deck is too much information. Next one will be more concise and clear.

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    2. I read every slide, and saw that you generated a lot of the exhibits and graphs from scratch. That's A LOT of work for one week. I owned a moderate position since a year ago and doubled down in this sell-off. Given that most of the motivated selling is probably done by now, I would expect upward pressure on the price. As you pointed out, LILA isn't stupid cheap (e.g. double digit FCF yield) but it certainly looks very compelling given the tailwinds from increasing broadband penetration. We also have to remember that this is a roll-up. On that note, do you believe LILA is positioned to begin acquiring soon?

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    3. I read every slide, and saw that you generated a lot of the exhibits and graphs from scratch. That's A LOT of work for one week. I owned a moderate position since a year ago and doubled down in this sell-off. Given that most of the motivated selling is probably done by now, I would expect upward pressure on the price. As you pointed out, LILA isn't stupid cheap (e.g. double digit FCF yield) but it certainly looks very compelling given the tailwinds from increasing broadband penetration. We also have to remember that this is a roll-up. On that note, do you believe LILA is positioned to begin acquiring soon?

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    4. I read every slide, and saw that you generated a lot of the exhibits and graphs from scratch. That's A LOT of work for one week. I owned a moderate position since a year ago and doubled down in this sell-off. Given that most of the motivated selling is probably done by now, I would expect upward pressure on the price. As you pointed out, LILA isn't stupid cheap (e.g. double digit FCF yield) but it certainly looks very compelling given the tailwinds from increasing broadband penetration. We also have to remember that this is a roll-up. On that note, do you believe LILA is positioned to begin acquiring soon?

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    5. Based on what management has said, LILA would not be in the position for buybacks unless they had adequate FCF, which they won't in 2016 due to last year of Project Marlin, increased capex in Chile for expanding the footprint, and other capex items. The lack of current FCF, current leverage profile, and the share price make it difficult to acquire currently, but not impossible, it would likely anger shareholder's even more as they would likely issue either parentCo Global shares or LILA shares in mid/high $20s.

      I truly hope they focus on integrating CWC first, improve the organic opportunities in the current footprint, bring strong ROIC out of Chile opportunity and make sure they aren't seeing lower ROIC due to competitors announcing FTTH expansion as well. Additionally, LILA needs to communicate with shareholders better. It has been rather poor over the last 6-12 months.

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  4. Thank you Value Seeker for this incredibly detailed look at LiLAC. You used many sources in your research. How long did you work on this deck?

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  5. This comment has been removed by a blog administrator.

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  6. As a shareholder, my head is still spinning from today's movement in the stock price. Do you believe the 27% drop in price to be warranted?

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    1. I can see both sides of the argument. For those that say the massive share price decline was not warranted, they could point to the fact that the new synergies for CWC of $150m are a solid amount, that the new build of VTR seems to still be holding up, and that management is still working through the integration of CWC, who was still working through their Columbus acquisition. The subsea assets are still very valuable, and will make LILA the lower cost provider in the region, and this helps with future M&A synergies as well.

      For those that say it was warranted, they point to the leverage and fact that the growth is less than expected, they guided downwards, the synergy time of 2020 is probably a year longer than people wanted (and investors are already skeptical), it is clear to me they overpaid for CWC, and management looks shaky as of the last year or so.

      I fall somewhere in the middle. The business could still do okay, what I worry about the most is - the long term growth "story" was built on management rolling up LatAm opportunistically, at reasonable prices, and having strong synergies, rinse and repeat across the region. This is their first big acquisition in LatAm (exc. Choice and OneLink) but far from their first big acquisition. The management team is supposed to be deal makers and superior operators. Now, they look like they can't really do either, and thus the belief of "Liberty management + cable + under-penetrated region" that rested on management skills is a harder case to make. Management hasn't done well in the last couple of years for both LBTYA and LILA, so I should've brought more awareness instead of letting them pass go so much due to their overall track record and belief Malone will ultimately make the right call for shareholders. I still think LILA will be just fine 3-5 years from now; however, most don't have this sort of timeframe or can withstand the volatility in the stock price.

      The stock is far cheaper now, but a lot of the thesis is on shaky ground now. They need to really show they can execute on the integration of CWC at this point, a little more of a "show me" stock, now.

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    2. Value Seeker, thank you for the articulate thoughts. I agree with you that the level of uncertainty is higher given what's transpired. Maybe it's the speculator in me, but I can't help but think that now is a good time to double down. It's usually at a time like this, when the picture isn't clear, that stocks get sh##-k#cked.

      I just noticed that Mike Fries bought >$1 million of LiLAC Class A on Nov. 8. It's probably not a big purchase for him, but still a vote of confidence nonetheless.

      Could it be that last quarter will be seen in hindsight as a blip or temporary speedbump? In late May, prior to the announcement that the 117 million shares would be distributed, the stock was at $42.70. I understand that the market was pricing in a much quicker roll-up story out of the gate, but seeing >50% of the equity value evaporate seems way overdone.

      I spoke with one of the IR guys; he said he suspects that weak hands were responsible for the magnitude of the sell-off. For example, maybe some remaining Liberty Global shareholders dumped it. Also, most of the sell-side analysts who cover LiLAC might have been required to initiate coverage on it by virtue of their coverage of Liberty Global.

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    3. Value Seeker, thank you for the articulate thoughts. I agree with you that the level of uncertainty is higher given what's transpired. Maybe it's the speculator in me, but I can't help but think that now is a good time to double down. It's usually at a time like this, when the picture isn't clear, that stocks get sh##-k#cked.

      I just noticed that Mike Fries bought >$1 million of LiLAC Class A on Nov. 8. It's probably not a big purchase for him, but still a vote of confidence nonetheless.

      Could it be that last quarter will be seen in hindsight as a blip or temporary speedbump? In late May, prior to the announcement that the 117 million shares would be distributed, the stock was at $42.70. I understand that the market was pricing in a much quicker roll-up story out of the gate, but seeing >50% of the equity value evaporate seems way overdone.

      I spoke with one of the IR guys; he said he suspects that weak hands were responsible for the magnitude of the sell-off. For example, maybe some remaining Liberty Global shareholders dumped it. Also, most of the sell-side analysts who cover LiLAC might have been required to initiate coverage on it by virtue of their coverage of Liberty Global.

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  7. Value Seeker, other commentor I cannot spell the name of on my keyboard,
    Do you think Q3's incredible drop is due to the misinterpretation you mentionned in September between the way CWC reports their OCF and LILK does? (Meaning there hasn't actually been such disapointing numbers, it's simply the one-time difference in accounting methods? Are you buyers of LILAK at this point? As a shareholder (8% of my portfolio before the crash) I'm both scared and excited. Doing a lot of research to decide if I should massively increase the position because it's a bargain or if I was wrong in the first place and the market is right. Would love really value your opinion as your analysis is the most detailed I've read anywhere else!!

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  8. I stumbled into this blog a few days ago, and I am overwhelmed by all the info you put together - not only on LiLAC, but on the other companies too. Too much to grasp by looking over in such a short time frame, but a treasure to start learning on the companies you cover.

    Your blog is in my RSS feed per now. Great work, thank you very much.

    Tom

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  9. Do you have a free cash flow estimate for 2017? Thank you very much

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  10. Great stuff. Way I see it: You need to figure out how much you are paying for what is there today. Most granular way to do this, i think, is solve for FCF per share assuming only maintenance capex. That is, what is the FCF yield you are buying into. Second, you need to trust Malone and his CEOs to invest the cash in high return opportunities (buy backs vs. growth capex vs. m&a). They have a proven track record of getting 20+% levered returns for shareholders over decades. If you don't trust #2 based on history, don't even do the work on #1.
    To get to #1, I am struggling with a few things. You're presentation is helpful in some but I have some questions for you:
    1) Are you confident the way you strip out minority stakes using 78% multiplied by consolidated EBITDA is the best way to do this and do you feel very good about the 78%? Haven't spent the time you have on this but was getting to that piece of the analysis and frustrated with the CWC minority interest piece (Puerto Rico was easy).
    2) Did you calculate the FCF attributable to equity holders of LILAC? What normalized maintenance capex would you use for the LILAC holders piece of the biz? If you multiply everything through and get to OIBDA less interest less cash taxes you realize you're either overpaying or underpaying from an FCF yield perspective based on whether maintenance capex is 15% or 20% of revenue.
    For an asset like this (assuming it goes into Cable One type mode, even if it never does, good to think about the actual FCF to avail to shareholder).
    The million dollar question to me is what to use for maintenance capex.
    I am long, but struggle to size up until I really figure out at $21/share what FCF yield I am attaining.

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  11. How many shares does John Malone own?

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