We downgrade our recommendation for Millicom International Cellular S.A. (MICC) to Underperform based on its current valuation. The stock price has moved up by nearly 40% in the past year and is trading at its 52-week high at present. With respect to several valuation metrics, Millicom is trading at significantly higher multiples compared to both the S&P 500 average and the industry average.
We believe increasing competition in the telecom sector in the emerging markets may generate volatile revenue trends. Millicom is giving a major thrust to its African operations for future growth. However, Africa is seeing increased competition.
Global telecom giant Vodafone Group Plc. (VOD), South MTN Group Ltd, Bharti Airtel and France Telecom S.A. (FTE) are existing players in this market. The company’s Central/Latin American operations are also facing stiff competition from several large telecom operators like America Movil S.A.B. (AMX) and Telefonica S.A. (TEF).
A major concern for Millicom is the lingering weak global economic environment and an extremely tight credit market that may impact business prospects. This is particularly important as the company operates mainly in the untapped networking regions of Central & Latin America, and Africa.
Any unforeseen adverse political developments may hinder financial performance. Persisting recessionary conditions in these countries may impede higher levels of quarterly subscriber additions, which in turn, would result in lumpy earnings over future reporting periods.
Millicom expects customer addition to become volatile in the near future, due to variable factors including the macro economic environment, seasonality, SIM card registration, competitor promotions and marketing activities. Millicom expects to see a temporary slowdown in customer additions in Africa, driven mainly by the compulsory registration of new customers in Ghana and Tanzania.
Recently, Millicom reduced the price of its wireless modem by 21% in Rwanda to maintain the company’s market share in that country. The company is facing stiff competition from MTN Group Ltd., which is offering cheaper modems to attract more data subscribers.