Quick (pre-Q2 24) Millicom Update

Reject the $24 bid. Still ridiculously cheap with improving fundamentals and tons of upside optionality

With an action-packed Q2 and an earnings release coming up later this week, here’s a brief update on Millicom ( TIGO 0.00%↑ ).

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Disclaimer: This content is for educational and entertainment purposes only and is not intended as financial advice. Perform your own research and consult a qualified financial advisor. The author may hold positions in the discussed stocks. This is not a recommendation to buy or sell securities

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Timeline of Recent Events

• 8/5: Millicom releases their Q1 24 earning report, with a 2024 EFCF target of $550m (Stock price at close: $$22.90)

• 23/5: Bloomberg leaks that the biggest shareholder, Xavier Niel (XN), might bid $24 per share

• 24/5: XN confirms interest in a $24 per share offer, though no official bid was made

• 27/6: The Board of Directors states that $24 would significantly undervalue the shares and raises the 2024 FCF guidance to "above $600 million."

• 1/7: XN makes the official offer of $24 per share

• 15/7: Millicom’s independent committee recommends to reject the offer, increases 2024 guidance and gives an outlook for 2025 & 2026

Created with TradingView

Increased Guidance (again)

In the recommendation to reject the $24 offer, TIGO 0.00%↑ has increased their guidance for 2024 once more and provided a very bullish outlook for 2025 - 2026 (the “Long-Range” Plan):

“While Millicom has gone through a period of constrained cash flows over the last several years, given meaningful investments made by Millicom in its business activities, including with respect to spectrum, capital expenditures and recent internal restructurings, Millicom’s management believes this investment period is nearing conclusion and expects Millicom’s cash flow generation to significantly increase over the coming years as reflected in the Long-Range Plan. “

And on top of that

However, the Long-Range Plan Expectations assume that no capital allocation activities or transactions, including distributions of dividends, share repurchases, strategic transactions or similar activities or transactions, have been undertaken by Millicom in the relevant period(s).

Or phrased differently: cheap on FCF projections, with “free” upside optionality.

Millicom likely has no incentive to be overly bullish and overpromise here, making these targets seem pretty achievable. A perfect setup for future beats and raises.

Valuation

As a reminder, Millicom has a market cap of $4.2B at a share price of $24.55. Based on the latest projections, this translates to:

• 2024: 15.7% FCF yield

• 2025: 16.7% FCF yield

• 2026: 19.8% FCF yield

In my initial write-up in March 2024, the stock traded at $19.2, with a projected NTM FCF yield of $16.2%

Portfolio Spotlight: Millicom

Despite the run-up since then, the stock still seems very cheap. The price increase has been driven by improved fundamentals, not multiple expansion.

The bid price of $24 is an anchor holding the stock down, for now (?).

The earnings call this Friday (2nd of August) will be a interesting since TIGO 0.00%↑ basically increased their 2024 FCF guidance by 20% (!), from $550m to $660m, in a single quarter.

This is already spelled out in the recommendation by the independent committee, but maybe we need an earnings call and a pretty presentation to make the stock move.

Or maybe this will only happen after the acceptance period for the offer ends on August 16th.

Why the Low Bid?

I'm puzzled by Xavier Niel's low-ball bid. The stock was already trading above the bid price when he made it. It's hard to see many shareholders accepting it. So, why did he do it? We can only speculate for now:

1. It really was an accidental leak

2. The bid holds the stock down and works an anchor price to make a future bid seem like a better deal

3. Niel “forced” Millicom to increase their guidance before Q2 24 earnings call. But what’s to gain from that?

4. ?

I don’t like that I can’t pinpoint the “why?”, but it’s hard to see how you lose at this point, at this price.

Even if Niel eventually takes Millicom private before sharing all the upside with others, my bet is that shareholders will still make a good return.

The downside is protected by fundamentals and a very cheap stock.

Conclusion

I believe Millicom still offers an excellent risk/reward profile with potential quick catalysts. Therefore I will increase my position to 10% of the model portfolio when the US market opens.

(10% is the position sizing cap I set for myself)

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Resources

If you’re interested in TIGO 0.00%↑ , be sure to check out:

• glimourk on twitter and his alwaysinvert substack have been my main source of info for all things Millicom.

A Timeline of $TIGO

• Leonardo twitter

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