Description

Liberty Latin America’s shares are trading at a low multiple of the levered free cash flow they should be able to generate in the next few years.  While relatively high financial leverage and FX exposure may make the shares screen poorly in the current environment, I think the risk of permanent capital loss in the equity at this price is relatively low.

The shares have been written up on VIC several times in the past, most recently by goirish in February 2017.  There’s been an active message board on that thread and there’s plenty of good analysis so I’ll keep this brief as it’s more a recommendation to buy based on the price opportunity.

While the market is obviously concerned with Liberty’s leverage (3.8x net debt/EBITDA), management has been prudent in terming out maturities (average tenor 6.1 years, 90% not due until beyond 2024), hedging FX exposure (though over 60% of OCF is dollarized) and keeping the leverage in separate credit pools, non-recourse to the parentco.  Outside of $400 million of convertible notes at the parent company, the rest of the $8.5 billion of total debt as of December 31st was incurred at one of the four primary borrowing groups: C&W, VTR Finance, Liberty Puerto Rico and Cabletica.

Given this dynamic, I think the shares are trading at an attractive multiple of just the levered free cash flow the Puerto Rico business will generate in the next year or two.  LILAK shares closed on Friday at $9.27. I think in the next 12-months the market will have visibility into well over run-rate $1.00/share of Free Cash Flow from just the Puerto Rico operations (even burdened for the interest expense from the HoldCo converts), which are just under a third of consolidated EBITDA.  So I think you can argue there’s over 50% upside to just the equity value of the Puerto Rico operations. The catalyst for value recognition should be the closing of the $1.95 billion acquisition of AT&T’s wireless and wireline assets in Puerto Rico, still on track for this quarter (Q2). PF Leverage at Puerto Rico is 4.25x Net Debt/EBITDA excluding synergies and the debt is all termed out to 2026/2027.

On top of the upside from Puerto Rico, the VTR in Chile is still a high-quality cable asset that I think is potentially worth another $10-$13/share of equity value.  The Cable & Wireless assets are more controversial but I don’t think you need to take a real view on them to find the underlying equity attractive here (at least over the medium-term).

While the market is obviously concerned about the economic impact of COVID-19 on the already struggling economy of Puerto Rico, I think subscriber churn will still be relatively modest given the nature of broadband demand even in a fragile economy like Puerto Rico’s.  Additionally, following the hurricanes Maria and Irma in 2017, the government allocated $40 billion to rebuilding (~40% of Puerto Rico GDP) that mostly still hasn’t yet been spent.  

Over the past 12 months in the U.S., you’ve seen cable companies like CHTR have their share prices re-rate as the market gained comfort with how declining video subs actually led to an improvement in profitability and earnings and how fixed wireless 5G was less of a real risk to the business model.  I think when the market gains comfort with the financial leverage at LILAK overall, you will see a rerating similar to what you saw in CHTR for at least the Puerto Rico and Chile businesses.

There also seems to be a disconnect with the market’s perception of LILAK’s leverage profile and management’s, as evidenced by the $100 million share repurchase authorization (6% of current market cap) announced on March 17th.

Over the long-term, I still think there’s an attractive opportunity to roll up cable & wireless assets across Latin America.  I think CEO Balan Nair is a strong and capable manager and he seems laser-focused on driving Operating Cash Flow Less CapEx to the mid-20%s (from 21.2% in 2019).

On the Cable & Wireless side, I have to imagine Digicel’s financial difficulties and proposed restructuring will be a positive from a competitive perspective (https://www.fitchratings.com/research/corporate-finance/fitch-downgrades-digicel-limited-digicel-international-finance-limited-03-04-2020).

Catalyst

• Closing of AT&T Puerto Rico Acquisition and synergy realization
• Digicel restructuring
• Share Repurchases
• Better-than-expected subscriber churn