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February 28, 2008

NII Holdings: Finally In The Clear?

NII Holdings (NIHD) reported better than expected 4Q07 financial results yesterday but the shares sold off sharply anyhow. I can see three potential issues. First, EBITDA guidance is a bit low even after adding back the $30 million in unexpected expenses related to upgrading the company's network in Peru to 3Q. Revenue guidance is in line so there is some evidence of margin pressure. Second, the Peru 3G build out is again raising fears of a big spike in capex for the rebuild in Mexico and Brazil. Third, 1Q08 net adds will be down sequentially. They were up sequentially in 2007 and flat in 2005. This serves to undermine the fragile confidence that guidance is good and the Mexico situation is stable.

By way of background, NIHD shares have been cut in half since last summer when competitive activity in the company's largest market, Mexico, picked up. Sub growth in Mexico slowed, ARPU trends deteriorated, margin expansion stopped, and talk of the need for massive network upgrade moved front and center. Analysts lowered subscriber and financial estimates in response.

I think the shares are way oversold and that as time passes, maybe one or two quarters, the shares will move up considerably. Ultimately, 4Q07 sub and financial results beat the lowered estimates. These results show that management can handle the more competitive environment in Mexico and still “EXCEED” numbers. This makes me believe that the 2008 EBITDA guidance is likely low, especially given momentum in Brazil, which no represents 30% of subscribers and 25% of EBITDA....

....In addition, the per pop build out costs for 3G in Peru suggest that the entire build out can be done for a few billion, far less than some people are assuming and something the company can easily finance given their balance sheet rapidly rising free cash flow that should explode starting in 2009.

Finally, even on the conservative guidance we are looking at 29% revenue growth and 27% EBITDA growth in 2008 for a stock that is trading at 7 times EBITDA and 15 times EPS with a Board that is willing to buyback meaningful amounts of stock. Helping matters more, NIHD just beefed up the management team adding the very successful CEO from Dobson Communications (just purchased by AT&T). The stock lacks a catalyst until 1Q numbers are out but I think it should be held or slowly accumulated. Longs will just have to tough it out for another few months.

P.S. I am no technician but does the fact that the huge volume decline yesterday held in the recent trading range indicate that sentiment is washed out to the downside? [UPDATE 2/29 11:45: Maybe so seeing as the shares are up tow days in a row even with a terrible market]

Posted by Steve Birenberg at February 28, 2008 10:52 AM in NIHD