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AXTEL Is the Party Over? Not Yet @Analisis Fundam

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AXTEL Is the Party Over? Not Yet @Analisis Fundam Equity Research Me xico Company Note August 12, 2020 AXTEL www.banorte.com Is the party over? Not yet @analisis_fundam . Axtel has resumed the search of strategic options for its Infrastructure Consumer and Telecom for telecom business unit or the entire company, which could soon unlock intrinsic value of the stock Valentín Mendoza Senior Strategist, Equity [email protected] . As we have highlighted before, said segment is attractive due to its high profitability, growth potential and higher valuation, making the Juan Barbier Analyst company a compelling acquisition target, in our view [email protected] . With a SOTP model, considering Infrastructure’s value, we raised our PT2020 to MXN 9.00 (vs MXN 4.50 previously), implying a BUY FV/EBITDA 2021E multiple of 7.7x. We maintain our BUY rating Current Price MXN 6.59 PT 2020 MXN 9.00 Dividend 2020e We still see value in the stock. We adjusted our projections model, reflecting Dividend Yield (%) the functional separation of the company into two strategic business units: IT Upside Potential 36.6% ADR Price US$41.57 Services for enterprises and governments and Infrastructure for telecom. The Max – Min LTM ($) 6.70 – 2.30 latter, as mentioned above, stands out due to its attractive profitability and Market Cap (US$m) 834.4 Shares Outstanding (m) 2,875 growth potential -in the face of increasing connectivity needs, the upcoming Float 22% launch of 5G, and with that, the advent of internet of things-; thus, making Axtel Daily Turnover US$m 8.7 Valuation metrics LTM a compelling acquisition target. That said, in our view, the market should be FV/EBITDA 5.1x willing to pay a higher valuation for the company. Meanwhile, Axtel recently P/E 47.7x resumed the search of strategic options for its Infrastructure segment and/or the Relative performance to Mexbol entire company, and Alfa recently confirmed that it expects to conclude either LTM of these options within the next 12 months. A such, we decided to reflect the 200% potential value behind the Infrastructure business. Using a sum-of-parts 150% valuation model, we determined a FV/EBITDA 2020E target multiple of 11.0x 100% for this segment, in line with peers’ median and precedent transactions, while 50% 0% assuming 5.6x in Services. Therefore, we are raising our PT2020 to $9.00 -50% (FV/EBITDA 2021E of 7.7x) up from $4.50, yet reiterating our BUY rating. Aug.-19 Nov.-19 Feb.-20 May.-20 Aug.-20 ago.-19 nov.-19 feb.-20 may.-20 ago.-20 MEXBOL AXTELCPO Financial Statements Valuation and Financial metrics 2018 2019 2020E 2021E 2018 2019 2020E 2021E Rev enue 14,876 12,784 12,811 13,387 FV/EBITDA 6.2x 7.4x 4.8x 6.2x Operating Income 965 774 2,858 1,440 P/E 17.4x -1,355.2x 24.1x 133.6x EBITDA 5,203 4,465 6,424 4,668 P/BV 5.3x 5.5x 4.6x 4.4x EBITDA Margin 35.0% 34.9% 50.1% 34.9% Net Income 1,095 -14 782 141 ROE 35.8% -0.4% 20.8% 3.4% Net Margin 7.4% -0.1% 6.1% 1.1% ROA 3.9% -0.1% 3.0% 0.6% EBITDA/ interest 2.8x 3.3x 4.4x 3.2x Total Assets 28,156 24,331 26,338 25,574 Net Debt/EBITDA 2.6x 3.1x 1.9x 2.2x Cash 2,249 858 4,175 4,716 Debt/Equity 4.3x 4.4x 3.9x 3.5x Total Liabilities 24,535 20,920 22,221 21,315 This document is provided for the reader’s convenience Debt 15,662 14,886 16,066 14,944 only. The translation from the original Spanish version Common Equity 3,621 3,411 4,117 4,258 was made by Banorte’s staff. Discrepancies may possibly arise between the original document in Spanish and its Source: Banorte English translation. For this reason, the original research paper in Spanish is the only official document. The Spanish version was released before the English translation. The original document entitled “¿Se acabó la fiesta? Todavía no” was released on August 11, 2020. Document for distribution among public 1 AXTEL – Financial statements Revenue & EBITDA Margin MXN, Millions MXN, million Year 2018 2019 2020E 2021E CAGR 18,000 60.0% Net Revenue 14,876 12,784 12,811 13,387 -3.5% 16,000 50.1% Costs of goods sold 7,174 6,104 6,182 5,870 -6.5% 50.0% 14,000 Gross profit 7,702 6,679 6,629 7,516 -0.8% 35.1% 35.0% 34.9% 34.9% 12,000 40.0% General expenses 6,944 5,842 5,759 6,060 -4.4% 10,000 Operating Income 965 774 2,858 1,440 14.2% 30.0% Operating Margin 6.5% 6.1% 22.3% 10.8% 18.3% 8,000 Depreciation 4,162 3,579 3,430 3,195 -8.4% 6,000 20.0% 4,000 EBITDA 5,203 4,465 6,424 4,668 -3.6% 10.0% EBITDA Margin 35.0% 34.9% 50.1% 34.9% 2,000 Interest Income (Expense) net (1,665) (1,127) (2,864) (1,303) -7.8% 0 0.0% Interest expense 1,869 1,370 1,476 1,466 -7.8% 2017 2018 2019 2020e 2021e Interest income 41 55 53 103 35.7% Other income (expense) (24) (102) (88) (127) 73.2% Revenue EBITDA Margin Foreign exchange gain (loss) 187 290 (1,352) 186 -0.1% Unconsolidated subsidiaries Income before taxes (699) (353) (5) 137 -158.1% Income taxes 118 (15) (788) (4) -133.6% Discontinued operations 1,912 324 Net Income & ROE Consolidated Net Income 1,095 (662) 782 141 -49.5% MXN, million Non-controlling interest Net Income 1,095 (14) 782 141 -49.5% Net Margin 7.4% -0.1% 6.1% 1.1% 1,200 30.2% 35.0% EPS 0.378 (0.005) 0.273 0.049 -49.3% 1,000 30.0% Balance Sheet (Million pesos) 800 19.0% 25.0% Total Current Assets 6,944 6,035 8,471 8,937 8.8% 20.0% Cash & Short Term Investments 2,249 858 4,175 4,716 28.0% 600 15.0% Long Term Assets 21,212 18,296 17,868 16,637 -7.8% 400 Property, Plant & Equipment (Net) 16,106 12,964 11,427 10,196 -14.1% -0.4% 10.0% 2.5% 3.3% Intangible Assets (Net) 986 633 947 947 -1.3% 200 5.0% Total Assets 28,156 24,331 26,338 25,574 -3.2% 0 0.0% Current Liabilities 8,778 5,178 7,354 7,506 -5.1% 2017 2018 2019 2020e 2021e Short Term Debt 505 635 2,169 2,104 60.9% (200) -5.0% Accounts Payable 7,297 3,701 4,036 4,218 -16.7% Long Term Liabilities 15,757 15,742 14,867 13,810 -4.3% Net Income ROE Long Term Debt 15,157 14,251 13,897 12,840 -5.4% Total Liabilities 24,535 20,920 22,221 21,315 -4.6% Common Stock 3,621 3,411 4,117 4,258 5.6% Non-controlling interest Total Equity 3,621 3,411 4,117 4,258 5.6% Net Debt & Net Debt to EBITDA ratio Liabilities & Equity 28,156 24,331 26,338 25,574 -3.2% MXN, million Net Debt 13,413 14,028 11,891 10,228 -8.6% Cash Flow 2018 2019 2020e 2021e 25,000 3.5x 3.8x CF from Operating Activities 5,411 2,957 4,465 3,268 3.1x 3.4x CF from Investing Activities 2,376 (528) 775 (1,861) 20,000 3.0x CF from Financing Activities (6,812) (3,821) (2,771) (2,096) 2.6x FX difference in cash & equivalents 16 1 848 1,229 15,000 2.6x Change in Cash Balance 991 (1,391) 3,318 541 1.9x 2.2x 10,000 2.2x 1.8x 5,000 1.4x 0 1.0x 2017 2018 2019 2020e 2021e Net Debt Net Debt to EBITDA Source: Banorte, BMV. 2 The right strategy. Let us remember that after the integration with Alestra, during the last 4 years Axtel has been implementing a transformation strategy for the company. Such strategy was focused on the sale of non-strategic assets, deleverage and the functional separation into two business segments. Regarding the former, in 2017 the company divested 142 telecommunication towers for $56 million. Later, at the beginning of this year, it completed the sale of 3 data centers for $175 million, and recently, it transferred the 3.5Ghz spectrum to América Móvil, receiving a MXN 90 million benefit. Meanwhile, the allocation of part of these resources for debt repayment has led to a significant decrease in company’s leverage. In this regard, ND/EBITDA ratio dropped from 5.5x in 2016 to 1.9x 2020E, aligning with the median of comparable companies. As we have mentioned previously, in our opinion, the discount the stock had historically kept against its peers due to high leverage, is no longer justified. Finally, Axtel has concluded the functional separation of the company into two business units: Infrastructure for telecommunications (Axtel Networks) and value-added services in information technologies for companies and government customers (Alestra). After this, Infrastructure contribution to 2019 results (net of intercompany operations with Alestra) accounted for 20% of revenue, but 51% of recurring EBITDA due to division´s EBITDA margin of 44.2% being consistently greater than the 21.4% of Services.
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