This is somewhat of a guru holding. I was holding Liberty Global when this was spun off, and I bought more of Lilac. With the hindsight I succumbed to what we would call social media frenzy over Liberty Lilac. Seeing many experienced investors on this name convinced me, as at the time I was not that experienced. The share price since tanked. However I think that it can now be attractive for long term returns.
Liberty Lilac is probably not a new name for my readers. It is a cable and telecommunications consolidator in Latin America and the Caribbeans. It is a tracking stock of Liberty Global. Its main assets are Cable in Chile and Puerto Rico, and sub sea cables and telecommunication services in The Caribbeans since the acquisition of CWC.
The company is combining these assets to find synergies in terms of services offered and costs. This is the classic liberty playbook, use debt or stock to buy more assets, find synergies, then buy more assets, buy back shares.
Cable equipment rates in the region are low and should increase in the long term. I do not think that the Caribbean region has fantastic growth prospects due to the Geography and weak demographics. Chile has great growth prospects. It would be interesting to see if Lilac would acquire a cable company in other large south american countries similar to Chile.
Lilac currently trades cheaply. Its market cap is $3.9 B usd. The operating cash flow is $1.1 B usd if I take the proportional non controlling interests. Total EV is higher due to the debt ($8.9 B usd – http://seekingalpha.com/article/4002365-much-debt-liberty-lilac-really). EV/Ebitda is then 7.8, using Lilac self defined Operating Cash flow (http://www.libertyglobal.com/pdf/presentations/Liberty-Global-Q3-2016-Investor-Call-Presentation-FINAL.pdf).
The value creation from now on is going to be clear. With strong EBITDA or OCW generation, some growth estimated at 7-9%, Liberty Lilac could reduce the enterprise value to Ebitda each year either by repurchasing shares, repaying debt, or growing revenue.
It is still a company hard to model due to the lack of clarity on Capex plan, and growth Capex required to reach this OCF growth. Currently the Capex is expected at 20% of revenues or $720 m USD annualy. This would leave us with an annual cash flow to reduce the EV of around $400 m. That is a 10% market cap reduction if all directed to the repurchases. I do not think that the funds will go to reduce debt (Liberty method) unless to prepare for another acquisition.
So to summarize, we have OCF growth of lets say 7% to be conservative, and market cap reduction of 10%. We also have a possible re-rating to an EV/EBIDTA of 10 as emerging markets go back into favour, which I think should happen since this is where the growth will be in the long term (See emerging markets in percentage of global GDP in the past 30 years for example), and a possible currency re-rating. If the stock re-rates higher, the capital allocation could go to more debt reduction. On top of that, we have a focused and experienced management team, and future synergies or acquisitions.
When I first bough it at around 35$ a share, CWC was not part of the company and it was rated higher. The country profile was better as Chile was a high percentage of revenues. Puerto Rico has also high wages compared to most of South America due to the USD.
But from today’s price point we should expect high value generation simply from existing cash flows and synergies.
The risks are;
-Weak macro in small countries where CWC operates.
-Local competition, its not possible to predict or clearly understand each competitive landscape as a shareholder unless you spend a lot of time following the company.
-Lack of disclosure clarity due to the tracking stock structure and generally messy reporting by Liberty Global.