The telecommunications industry requires strong capital investments to maintain long-term growth and the case of MEGA is no exception

Megacable Holdings (MEGA) had its investor day where it gave an important guide to the business plan towards 2026.

MEGA has a special project that is the evolution of the network, where it has already migrated 25,000 kilometers of houses switched to GPON fiber optics, out of the more than 117,000 kilometers it has installed.

With coverage in practically all the states, with the exception of Tamaulipas, they have a potential with 8-9 million homes (old houses) and a market share of 57 percent.

Certainly, the cable and internet services business is competed by four main players: MEGA, Televisa’s Cablevisión, Telmex and Grupo Salinas’s Totalplay.

However, the growth potential is high given the low penetration of Internet services in Mexico: With 62 subscribers for every 100 inhabitants nationwide and 29% with fiber optics, it is far from countries like Turkey with 77 subscribers for every 100 and one fiber optic penetration of 45% or China with 106 subscribers per 100 and of which 94 have fiber optic.

Likewise, growth in the last year was 13.3%, a sustained double-digit increase that we hope will continue in the coming years.

We expect MEGA’s revenue and EBITDA to double by 2026, representing compound annual growth for the next 5 years of more than 14 percent.

The telecommunications industry is an industry that requires heavy capital investments to maintain long-term growth, and the case of MEGA is no exception.

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Since the start of the network evolution project, investments as a percentage of sales have grown from 20 to 38% in the last quarter.

With this, the impact on free cash flow has been such that it has reported double-digit drops, although the issuer has kept its dividend policy intact, which at current prices is attractive with a yield of over 4 percent.

The guide offered is to maintain those investments to achieve in the next 3-4 years to double the potential of subscribers with a coverage in past homes of 16-18 million in total.

Likewise, the station’s projections are conservative given the increase in competition in the sector, which is why they expect a penetration of only 30 percent.

These assumptions allow for a significant rise in income for the next several years and the level of capital investments will be reduced to previous levels of 20 percent.

On the other hand, MEGA has a low acquisition cost per subscriber, since the connected house has a cost of 200 dollars and a construction cost that represents 40% of the total costs, so it is an optimized investment and in new territories.

This investment in turn supports the operations of the corporate business that currently represents 17% of revenues and with an EBITDA margin of 16 percent.

We expect this margin to increase in the long term given the inclusion and demand for integrated services such as cybersecurity and other cloud services that have a higher margin.

One of the main risks is the possibility that investments in fiber optics will become obsolete with the arrival of 5G.

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However, the administration told us that even the investments in 5G are higher, so they project a life of 10-15 years in the fiber optic project.

Currently MEGA has an attractive price and significant appreciation potential, making it a Buy opportunity.

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