Another Revisit - MICC

About this time last year, I spoke about Millicom International (MICC) - the Luxembourg based emerging market wireless company that I heavily recommended (Check out the review post here). Back then, I had upped my price target for the mid-70's to approximately $90/share over the long-term.

Now, I am of the philosophy that you have to continuously revisit your investments and assess if they are still a good fit for your portfolio. Companies change, circumstances change and the reasons you bought a stock can get out of whack in a real hurry. As a wise man still says - 'Don't Buy and Hold, Buy and Homework!'.

Since that post, MICC has indeed risen in price and is now trading at right around $90. With my previous price target acheived, I dug into the numbers to see if it is still worth holding.

Still A Strong Business

For those that don't remember, MICC's primary business is selling prepaid wireless services in third world countries. This includes countries with little or no wireline infrastructure, making wireless the primary means of communication. The company operates in 3 regions - Central America, South America, and Africa with Central America being the largest segment in terms of revenue.

Looking at the last year, it's evident that MICC's business has recovered well with the global recovery. EBITDA for the last 12 months (LTM) came in at a healthy $1.59 Billion - a solid 19.5% increase over 2008 (which itself was a record). More importantly, EBITDA margin has held at a steady 44% which is on the high end for the last 4 years.

Looking Forward

But having a solid business thus far isn't the only factor we need to consider here. All that information does is justify the increase in the stock price, but it doesn't give us much insights into what we have looking forward.

Looking at the company's annual report presentation, one of the most promising numbers I see is the Customer penetration, specifically in data usage. I look at the emerging markets to somewhat mirror the developed countries in data usage growth patterns (the theory worked for voice mobile phone usage). According to the presentation, MICC's current data penetration for Latin America is 5.2%. Assuming that the number is similar for the MICC's other regions, and the average penetration growth rate for the company is 47%, I think there's a good deal of room for revenue growth for MICC. Therefore, I expect data penetration to be a solid source of revenue growth for the company resulting in total 2011 EBITDA of around $1.95 Billion (slightly higher than analyst estimates which MICC has done a good job of meeting over the last few years). Assuming the current Market Cap/EBITDA multiple of approximately 6X, we come to a expected price of $107 - an almost 20% jump to the current price.

Risks

As always, there are some risks associated with MICC, or any investment. Besides the ever-present political risk of doing business in third-world countries, I think another important risk to take into consideration is the decreasing Average Revenue Per User. This key metric in the wireless industry has been decreasing by an average of about 15% each quarter over the last year. Likely due to the economic conditions, decreasing ARPU can significantly impact the profitibality of any wireless company (just as Sprint). Nonetheless, I think this risk is somewhat mitigated by the data usage penetration mentioned above. This product will help MICC offset this decline by providing a new revenue source. Futhermore, even with penetration at only 5%, the rate of ARPU decline has decreased in the latest quarter to less than 10%.

Bottom Line

With the strong business model and a history of delivering to shareholders, I think MICC is a strong bet if you want to take advantage of early-cycle emerging market growth. Even with the runup in the share price, I think the company has a conservative upside of at least 10-15% over the next year, and therefore, I think it's a good buy.