Millicom International Cellular

Millicom continues to execute extremely well. Consolidated service revenue increased 60% during the second quarter, or about 5% excluding acquisitions and currency shifts. The EBITDA margin was roughly flat versus the prior year, despite ongoing integration efforts, and cash flow increased sharply.

Why it matters: Millicom's ability to cut costs while still driving respectable growth continues to surprise us. In Colombia, the EBITDA margin was flat year over year despite doubling in size following the acquisition of Telefonica's operations in the country, which were far less profitable than Millicom's. Outside of acquisitions, Paraguay was the largest contributor to EBITDA growth in US dollar terms, with the margin expanding 6 percentage points year over year. However, a very strong currency partially drove this result. The story was similar in Bolivia, the second-largest contributor. Free cash flow was exceptional during the quarter, up nearly 60% to $327 million. Management now expects to generate around $1.1 billion for the year, up from its prior forecast of at least $900 million. The weak US dollar has helped, but Millicom has also demonstrated its ability to execute extraordinarily well.

The bottom line: After updating our currency assumptions and again increasing our margin assumptions, we increase our fair value estimate to $92 from $80. While we continue to like Millicom's position in most of the markets it serves, as our narrow moat reflects, we think the shares have gotten a bit ahead of themselves. Millicom used cash flow and incremental borrowing during the quarter to fund the last portion of the buyout of the Telefonica business in Colombia and pay a special dividend. With the growth in EBITDA, however, net debt leverage ticked down slightly to 2.7 times. Management expects to end the year below 2.5 times, putting it in a solid financial position.

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Our $92 fair value estimate equates to an enterprise value of about 6.3 times our 2026 EBITDA estimate, which includes the acquisitions in Ecuador and Uruguay and a partial year of Telefónica Colombia's results. With a full year of consolidation and continued cost-cutting in Colombia in 2027, we expect strong EBITDA growth, taking the enterprise value implied by our fair value estimate down to 5.7 times EBITDA. We view a multiple in the 7-times range as high, given where US telecom firms trade, and the higher economic and regulatory uncertainty Millicom faces.

Absent acquisitions, we assume Millicom will modestly expand its wireless customer base in the coming years while gradually increasing revenue per customer. In Colombia, Millicom's largest market, brutal competition has caused the size of Millicom's wireless customer base to stagnate in recent years. We expect the merger with Telefónica's Colombian business will put this business on a more solid footing, allowing for consistent customer and pricing growth. We expect customer growth in Guatemala to remain minimal, given the firm’s market share lead and the presence of América Móvil, which has far greater financial resources.

We expect that improving competitive intensity, increasing smartphone penetration, better discipline around promotional efforts, and stabilizing currencies in many markets will help lift average revenue per wireless customer over time. We model average monthly revenue per customer increasing to nearly $7.70 in 2030 from $6.30 in 2024 and 2025, which is only modestly higher than the 2019 levels of $7.26. Recent currency gains versus the US dollar have caused us to move our 2030 estimate up from about $7.40 per month.

These assumptions result in 3% average annual wireless services revenue growth from 2027 through 2030, following rapid growth in 2026 driven by acquisitions.

We expect continued steady growth in the fixed-line business in the coming years. With broadband adoption continuing to grow, we expect the firm’s residential customer base to expand modestly over the next five years, driving more than 4% annual consumer fixed-line revenue growth from 2027 to 2030, following an acquisition-related bump this year. We also expect that business services revenue will continue to rebound.

In total, we expect revenue to grow about 3% annually over the next five years, excluding acquisitions. Recent cost-cutting efforts have delivered impressive margin expansion, even as the firm has undertaken integration efforts in Colombia. We no longer expect the EBITDA margin to drop sharply in 2026. We now forecast a 46% margin for the year, down only slightly from 47% in 2025. We then expect the EBITDA margin to expand to 51% by 2028 as Millicom gains efficiencies in Colombia and margins in other countries drift higher. We still don't expect all of this margin expansion to prove durable over time as economic and competitive pressures push the firm to reinvest cost savings in promotions and improved customer service. Still, we model a long-term EBITDA margin just below 50%.

We assign Millicom a narrow Morningstar Economic Moat Rating based on efficient scale as a moat source. While the firm isn't large on a global scale, it holds a strong market share position in most of the countries in which it operates. Scale in a country is generally more important than global scale for controlling costs in that country.

Because of the nature of the telecom industry, it is very difficult, though not impossible, for new operators to enter the markets Millicom serves. The cost of building out a network and acquiring the customers needed to reach the scale required to generate a decent profit is too great in most cases, especially in markets near maturity. Furthermore, the populations in the countries Millicom serves are generally small and thus often not worth the effort for the largest telecom carriers to get involved. Notably, Telefónica has recently been exiting several Latin American markets to increase focus and reduce leverage.

Telefónica’s exit had a particularly sizable impact on Guatemala, where the number of wireless competitors was reduced to two. Guatemala is one of Millicom’s most important markets, accounting for more than 20% of revenue. Millicom holds about 55% wireless market share in the country based on the number of customers served. The firm has also doubled the size of its fixed-line customer base since 2017 and now serves nearly 20% of Guatemalan households. With a strong competitive position and rational competitive environment, Millicom has consistently generated EBITDA margins above 55% in Guatemala, a level few carriers globally have attained, allowing for very strong returns on capital.

In Colombia, the one large Latin American country where Millicom operates, the firm’s position historically hasn't been as strong. Until it acquired Telefónica's operations in the country, it was only the third-largest wireless operator, and it had struggled to maintain fixed-line broadband market share. América Móvil is the dominant wireless and cable company in the country, a position it has maintained despite regulatory pressure. The entrance of Wom, an aggressive wireless competitor, in 2021 also hurt wireless pricing. With the acquisition of Telefónica's Colombian operations, Millicom has gained scale nearly on par with América Móvil, putting the two firms far ahead of Wom, which recently exited bankruptcy protection. Millicom still needs to integrate the two operations, which could prove challenging, but the Colombian business is heading in the right direction.

Panama, Millicom’s fourth-largest operation based on revenue, presents an interesting case. América Móvil sold its Panamanian business to Cable & Wireless, a subsidiary of Liberty Latin America and the Panamanian government, in 2022, reducing the number of wireless carriers in the country to three from four. Following the regulators’ decision to allow the merger, Digicel, one of the three remaining operators, decided to exit the market. As a result, Millicom and C&W are now similarly sized players operating in a duopoly. C&W is investing to expand its fixed-line footprint, though, which has hurt Millicom’s ability to expand its broadband customer base.

Millicom holds strong wireless market share across nine Latin American countries with a combined population of 145 million people and owns high-quality cable networks that can provide broadband to 22 million homes and businesses in the region.

Broadband penetration remains low across the region, and only about 60% of customers own a 4G smartphone, providing a long runway for growth.

Millicom should be able to improve its margins and cash flow as it focuses on efficiency, expands its converged customer base, and gains additional scale.

Millicom’s recent acquisitions have pushed its debt load much higher than historical levels. This debt amplifies the economic, political, and competitive risks the firm faces.

The firm is subject to significant currency movements, as evidenced by the Colombian peso declining sharply against the US dollar in recent years.

The company's capital structure is complex, with minority investors holding stakes in some subsidiaries.