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Millicom (MICC) posts decent earnings considering

Thats the good news. Unfortunately Millicom International Cellular's (MICC) stock dropped 33% today. It's difficult to follow what the market saw that was so scary about the report. A 27% increase in revenues followed by a 25% increase in EBITDA seems rather impressive in this economy. Especially considering the low valuation level of 2.7x EBITDA that MICC now trades at. Does valuation not matter any more?

Highlights of the Q3 report:
  • 53% increase in subscribers for Q3 08 versus Q3 07, bringing total subscribers to 30.6 million
  • 27% increase in revenues for Q3 08 to $869 million (Q3 07: $686 million)
  • 25% increase in EBITDA for Q3 08 to $369 million (Q3 07: $296 million)
  • 17% increase in net profit for Q3 08 of $161 million (Q3 07: $138 million)
  • Basic earnings per common share for Q3 08 of $1.49 (Q3 07: $1.36)
Millicom International Cellular S.A. is a global telecommunications group with mobile telephony operations in 16 countries in Asia, Central America, South America, and Africa. It also operates cable and broadband businesses in five countries in Central America. The Groups mobile operations have a combined population under license of approximately 291 million people.

Though the list of countries includes unstable locations like DRC, Cambodia, and Laos to name a few the diversification in these 16 high growth, low mobile penetration countries reduces the risk that any one country might alter its mobile operations whether from political instability or economic problems. To me, this provides the ultimate emerging market growth vehicle. MICC is basically a mobile emerging markets mutual fund all by itself.

Unfortunately the market doesn't get my concept on the value of MICC. Sure the conference call mentioned several issues including currency translations impacting revenue. Other issues with local country energy and food inflation impacting customers ability to spend on mobile calls. Still though, MICC increased subscribers by 53% to over 30M. Sure the ARPU per user was down, but that only owes to the economic crisis the world now faces and short term inflation impacts in places like Africa that will surely disappear now that the input costs have substantially declined.

Liquidity issues might have sparked the selloff. The CEO mentioned putting off the early redemption of a $460M note that only seems prudent in a market where it's difficult to borrow cash. Why not preserve your $1B cash position (net debt is only $800M) until the markets reopen? Whats amazing is that the balance sheet is remarkable for a wireless company. Most domestic plays are loaded with debt. Makes you wonder if that market doesn't have it wrong about the riskiness of emerging markets. If this spooked the market, then MICC will rebound sooner rather then later.

Some subscriber growth numbers to ponder:
  • DRC (Africa) - 141%
  • Tanzania (Africa) - 110%
  • Laos (Asia) - 101%
  • Senegal (Africa) - 84%
  • Ghana (Africa) - 82%
  • Honduras (C America) - 71%
  • Sri Lanka (Asia) - 58%
  • Paraguay (S America) - 42%
  • Guatemala (C America) - 39%
From these numbers, you can see that MICC still has high growth from plenty of locations in all 4 regions. Africa added nearly 1M subscribers alone which provides a rare investment option in that continent.

Listen to the conference call and you'll hear plenty of questions about country specific issues such as competition, currency, taxes, and inflation. All in all though, MICC continues to perform in a difficult market. At a current market cap of only $3.8B and a Enterprise Value of roughly $4.6B, its difficult to follow why the analysts focus on such micro issues instead of focusing on the macro valuation picture. On all accounts, MICC is very cheap and the subscriber growth rates show that the product is in hot demand. Customers may use the service sparingly during the crisis but it seems almost assured that mobile service is a way of life in these countries now. As much, MICC should have high growth for decades to come. Buy when others are fearful.


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