It’s been an interesting week for Liberty Global Latin America (LILAK) with the stock up almost 15% after billionaire CEO John Malone bought $16.3M of the stock in the open market, his first open market purchase in any of his businesses since 2013. LILAK has been a top holding for Nitin Sacheti, portfolio manager of Papyrus Capital, since May, and he believes the stock has significant upside. Nitin shared his in-depth thesis with a complete breakdown of LILAK’s complex market segments on SumZero. I sat down with Nitin to answer a few high level questions about LILAK and Malone.
Nitin Sacheti, Papyrus Capital: LILAK offers cable services (television, broadband internet and phone) along with wireless services in Chile, Puerto Rico, Panama, the Bahamas, Jamaica, Trinidad and over a dozen other smaller islands across the Caribbean. They also own the largest undersea fiber optic cable in the region.

Schiefelbein: Why did John Malone choose to buy this much LILAK, and more importantly why now? Is this a significant amount for the billionaire businessman? What do you think his plans are?

Great question. I think Malone sees what we see, a good business trading at a discounted valuation with significant organic growth and synergy upside through regional consolidation. I think he sees that the bottom is in on the stock based on recent issues being one-time and they’ve increased prices while the shareholder shift is mainly done. What’s interesting is that in the 3 days he purchased LILAK shares, he was 15-38% of the volume which is very large for a single buyer. He could still be opportunistically buying stock given LILAK’s future prospects.

Schiefelbein: So what about LILAK caught your eye as a value investor? What are LILAK’s future prospects?

Sacheti: As a value investor, I love buying businesses that are (1) run by a great manager with a keen eye for profitability, (2) possess secular growth and sustainable cash flows, i.e. they are good businesses and (3) are trading at a low cash earnings per share multiples. We identified LILAK as possessing all three with near term catalysts for the market to realize the true value of the business.

(1) John Malone is arguably one of the best CEOs in history, growing Telecommunications Inc. (TCI) from 100k subscribers in 1970 to $55B in 1999 when AT&T acquired the company. In addition, his Liberty companies have delivered a higher return over the past decade than Berkshire Hathaway or the S&P 500.

(2) We believe that cable is a phenomenal business and cable combined with wireless is even better. With streaming movie services and now 4K video, consumers are demanding faster internet connections in their homes. The substitutes to cable are inferior: copper-based DSL is too slow, fiber to the home is too expensive to build, and wireless is either too expensive at fast speeds or inferior at slow speeds. This allows cable companies to continue to sell higher broadband connections to customers with very little added cost. In Latin America and the Caribbean, broadband penetration rates are low and LILAK operates the only cable network in many of their markets, allowing them to grow through higher subscriber count and increased prices. In addition to cable’s monopoly, we love quad-plays where a single company offers a triple-play cable service (home telephone, broadband and television service), plus wireless service, AKA a quad-play. While triple-play customers usually stick with their provider for 4-5 years, a quad-play subscriber usually stays for 8 years, on average. Since the cost to sign up a new triple-play vs. quad-play customer is similar, the return to LILAK on their quad-play marketing spend is significantly higher.

(3) At about 10x our 2019 cash EPS or FCF/share with 30-50% cash earnings growth, we believe LILAK has significant upside with high predictability, given the aforementioned growth/profitability through broadband and quad-play.

Schiefelbein: The stock has dropped from a recent high of $49.90 in late 2015 to $25 today. If this is such a great business, run by a great team, why has the stock halved? What is the market missing?

Sacheti: That’s a great point. We believe the stock has halved because of some recent acquisitions that the market may not understand, combined with some technical pressure and asset complexity. Their recent M&A history is important in answering this question.

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