Re: NTL - Batman
I summarized the report into its key themes.
Thesis
1) 31% holding company discount should be reduced to 20% holding company discount.
2) TEO trades at 45% discount to peers and this discount should be eliminated.
3) Future profit growth as seen in most sell side research.
4) Returns are in cash dividends.
To summarize, the thesis is TEO is undervalued and should be considered for investment. NTL provides a discount to the undervalued TEO in exchange for assuming the risk of being in a holding company, a risk which resulted in no dividends for a decade. The no dividend condition will come to an end as higher capital structure layers are eliminated. The author presumes a 20% discount for that risk is appropriate vs. the 31% current discount. I agree. 15% could also be appropriate.
Risks
1) Changes to TEO’s competitive intensity
2) Argentine country risk
3) Political, economic and regulatory risk
I would like to add the key country risk from my point of view. It isn't nationalization.
Before this political fiasco, YPF looked somewhat shielded from a devaluation risk because its commodity, crude oil, is world priced (with some exceptions), not peso priced, and can be seen somewhat as a currency itself. Devaluation of the peso would have some impact, but not a full impact. Telephones do not have the same store in value as oil. It can be presumed that devaluation can be partially offset by raising prices (inflation). Over a 3-5 year time period, the effect of devaluation would be reduced through pricing adjustments, assuming no further devaluation, but there would be a sharp immediate hit to the asset value / stock price.
I see currency devaluation as a high risk in Argentina because of capital flight, low central bank reserves, and structural trade deficits which are somewhat held at bay by import restrictions and currency controls. One particularly bad harvest would wipe out central bank currency reserves with devaluation being the likely outcome.
The TEO discount looks primarily a result of the market discounting future currency devaluation.
How would you hedge the potential for devaluation? |
