[All figures above in MXN. ~18.6 MXN per 1 USD at time of writing]
Market Cap: $2.4B Net Debt: $1.2B TEV: $3.6B
Full disclosure: Telesites only trades ~$1M USD per day. So this is for PAs as well as patient and/or smaller funds that are not put off by that liquidity profile. The limited liquidity relative to the overall size of the business is likely part of why the opportunity exists.
Telesites is an attractive investment as it is poised to benefit from two powerful forces: 1) the increased use of data and smartphones in Mexico and 2) an increasingly competitive carrier environment in Mexico, resulting in significant network upgrades and colocation opportunities. This should create a large opportunity to build new towers as well as increase tenancy on existing towers with substantial operating leverage.
Telesites trades at 17.5x consensus 2018E EBITDA – a substantial discount vs U.S. peers (-22% vs SBA, -6% vs American Tower, -11% vs Crown Castle), despite far greater EBITDA growth potential as Telesites tenancy ratio ramps from its current low level of 1.082 (as of 9/30/17). Historically the U.S. tower companies have traded at ~18x NTM EBITDA. While that multiple sounds optically expensive this is not intended to simply be a relative valuation argument - given the nature of these businesses (high growth with long tailwinds relative to risk) we view the American tower companies as at least reasonably priced and Telesites as attractively cheap.
To wit, we believe that Telesites EBITDA can grow at 18% pa for the next 3 years, and is likely to suffer negligible multiple compression during that time frame, producing a comparable IRR.
Today, Telesites towers are being valued at $4.7M pesos ($260K USD) per tower by the market. As a point of comparison, American Tower recently purchased a portfolio of 142 inferior towers from Axtel at a valuation of $7M pesos per tower, a 48% premium to where Telesites trades today.
Telesites is the largest tower company in Mexico, with nearly 15,000 towers, and accounting for nearly 50% of all towers in Mexico. It was spun-off from American Movil, the dominant mobile network operator in Mexico, in January 2016, as part of new regulations aimed at promoting additional competition in the Mexican mobile market. The economic characteristics of Telesites and the Mexican tower industry are nearly identical to those in the U.S. (long leased assets with high incremental margins for additional tenancy) with the only key differences being the following: 1) rent escalators are indexed to inflation (vs the fixed escalation in the U.S.) and 2) land expense is passed directly on to the tenants. Similar to the U.S., owning a tower in Mexico is a wonderful business (contracted revenue with growing demand, a mission critical service for the customer, strong barriers to entry, high incremental margins, and negligible maintenance capex).
In the interest of focusing on the core of the thesis and not being redundant, we are taking as granted that the reader basically understands why tower companies are viewed as exceptionally good businesses - a view that we share. Any reasonably detailed write-up of, for example, Crown Castle (CCI) or American Tower (AMT) in the US will likely discuss those points in depth and, given Mexico's earlier point on the wireless growth curve, Telesites should enjoy a superior operational trajectory compared to those more-mature businesses.
For the decades preceding 2014, the Mexican mobile market was dominated by Carlos Slim’s American Movil (70% share), Spanish operator Telefonica was the #2 player with 22% share, and the rest was split among small struggling players such as Iusacell and Nextel Mexico. Mobile service prices were relatively high, and similar to other emerging markets, smartphone penetration and data demand remained muted.
In response to this, in 2013 the new Pena Nieto government created a new regulatory body called IFETEL, which identified American Movil as dominant player, and put in place a series of measures designed to promote competition and reduce American Movil’s share. In the years that have followed, several changes occurred in the landscape:
American Movil was forced to separate its towers into a new company (Telesites) owned by a broader group of shareholders, and make all those towers available to any competitor interested in colocating on them.
AT&T declared Mexico an area of investment focus and acquired the #3 and #4 players, Iusacell ($2.5B in 2015) and Nextel Mexico ($1.9B in 2015).
IFETEL announced the establishment of a new wholesale-only wireless network, Red Compartida, that would sell mobile-network capacity to any competitor who wanted it (designed to spur MVNO entrants). In October 2016, the project was awarded to ALTAN Redes, a consortium. As part of the project, Red Compartida must cover 30% of the Mexican population by May 2018 and 92% of the Mexican population by 2025.
Telesites is very well positioned as it has the largest portfolio of towers (~50% share), a rational #2 competitor (American Tower with ~35%) share, and the top 2 players are 85% of the towers vs 65% in the U.S. Telesites tenancy ratio has risen from 1.00 at the end of 2015 (American Movil as the sole tenant) to 1.082 as of 9/30/17 - we think this clearly has room to go higher, for example due to AT&T's expansion plans in Mexico. Mexico mobile penetration (92%) is still low compared to the rest of LatAm (~120%), and data usage is expected to rise, along with the rest of the world.
Bottom Line: Given the uncommonly rapid and highly visible growth prospects, we view Telesites as an attractive investment for those with multi-year time horizons and the ability to take advantage of thinner liquidity.
I do not hold a position with the issuer such as employment, directorship, or consultancy. I and/or others I advise hold a material investment in the issuer's securities.
Increase in tenancy ratio and flow through to financials