We reiterate our Neutral recommendation for Millicom International Cellular S.A. (MICC) ahead of its third quarter 2010 financial results. Massive growth of fixed/mobile broadband services, coupled with the mobile VAS business in Central/South America and Africa, will serve as fundamental business catalysts. The company has already deployed high-speed 3G wireless services in South America. Improved EBITDA margin and reduction in capital spending are likely to strengthen the company’s balance sheet in future.
At the same time, we remain concerned about increased competition in the African markets, where Millicom is emphasizing future growth. The stock price has moved up more than 65.7% in the last year and is currently trading at the high-end of its 52-week price range, which may restrict any above market gain in the near term. Volatile currency exchange rates may also hinder Millicom’s current growth rate.
Millicom’s strategy of offering prepaid cards through mass-market distribution and non-traditional channels, such as street vendors and freelance distributors, has proven to be effective. This method enables the company to keep costs low and margins high. In the second quarter 2010, EBITDA margin was 47%, far ahead of the company’s long-run target of 45%.
Management now expects to maintain 47% EBITDA margin through the rest of 2010. The company stated that net debt to EBITDA ratio will remain below 1 even after the payment of dividends and the completion of the proposed share buyback program.
Millicom is upgrading its older TDMA and CDMA wireless networks to high-speed 3G wireless capabilities in Latin & Central America. So far the company has 1.8 million 3G subscribers. This is expected to improve the company’s financials in future.
At the end of the second quarter of 2010, Millicom had approximately 36.7 million wireless subscribers, up 19% year-over-year. During the second quarter of 2010, Millicom added 1.6 million net new mobile subscribers.
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