NEW YORK-Amid good news about resurging American investments in Latin American mutual funds and the gradual rebound of Brazil’s economy, Donaldson Lufkin & Jenrette International announced it has started covering the region’s wireless telecommunications carriers.
“In order to initiate coverage on the Latin American cellular companies, we have reviewed the trends driving the industry worldwide and conclude it is about time analysts and investors changed their benchmarks,” said William Laurent, a London-based wireless analyst for DLJ, in a recent report.
Instead of subscriber penetration rates commonly used as a key criterion today, Laurent said a more accurate evaluation of potential can be inferred from the “Gross Domestic Product cellular penetration rate.” Most countries, whether rich or poor, spend about 2 percent of their GDP on telecommunications. Therefore, dividing a nation’s GDP by the number of wireless customers is a more precise indicator of market opportunity than raw numbers about subscribers as a percentage of population, Laurent contends.
The second new forecasting benchmark DLJ offered in this report is the substitution of average revenue per minute for average revenue per unit.
“Currently, investors would prefer an operator with ARPU of US$40 to [one] with twice the subscriber base but half the ARPU, yet over time the return on investment should be very similar provided the two have similar revenues per minute,” Laurent’s report said.
“The key to profitability will be the relationship between an operator’s average revenue per minute and its costs, including investment costs, per minute … We believe that analyzing ARPU could lead to very different conclusions than looking at ARPM. However, ARPM dictates profitability, not ARPU.”
After developing this model for evaluating wireless communications companies, Laurent and DLJ applied them to and offered recommendations on the stocks of a group of Latin American carriers, most of them in Brazil.
“Among the stocks worth highlighting, we have a ‘top pick’ rating for Telerj Celular, the cellular operator in Rio (de Janeiro) that trades at a 60-percent discount to its holding company,” Laurent said.
Code Division Multiple Access handset shortages caused Telerj to miss its target of 1 million subscribers last year, which it concluded with 750,000 customers. The company has announced a goal of doubling its subscriber base this year.
“The market does not believe this can be achieved in a year of recession, (but) we are ready to take the opposite view,” Laurent said.
“Our main worry is the availability of CDMA handsets, but we know that many brands are launching CDMA handsets or increasing the capacity of their existing operations in the second quarter of 1999. Qualcomm Inc. and others also will have significantly more locally manufactured CDMA handsets available soon.”
Laurent also gave “buy” ratings to several other wireless carriers, including Telesp Celular. The holding company that controls Telesp was created a year ago as part of Telebras’ break-up into 12 new companies.
Like Telerj, Telesp has been stymied in its CDMA rollout by a dearth of handsets. However, Laurent said DLJ understands “the shortage of handsets in Sao Paulo should be rectified in May when local production kicks in and Nokia CDMA handsets arrive.”
Another Telebras spinoff, Telemig Celular, also garnered Laurent’s “buy” rating, despite his concerns about bad debt among the carrier’s customers in the state of Minas Gerais.
“Credit-checking procedures are worse than in other areas as the former billing and collection department was not working well,” the DLJ report said.
“Management has decided to start outsourcing the collection of arrears to a company, and new billing systems have been put in place to address the issue.”
Compared with mid-1998, when bad debt peaked at 30 percent of Telemig’s total sales, the amount dropped to 10 percent by year-end and is expected to drop further.
On the positive side, Laurent said DLJ expects Telemig to increase its 448,000 subscriber base by 60 percent in 1999 and to achieve a market share of 50 percent in a region where the percentage of GDP spent on wireless continues to rise.
For Mexico, the investment bank assigned a “buy” rating to Iusacell, 47-percent owned by Bell Atlantic Corp. Iusacell is the second-largest cellular carrier in four of Mexico’s nine regions, including Mexico City. It also won personal communications services licenses in two additional regions, one in the north bordering the United States.
Iusacell stands to benefit from the introduction of calling party pays, expected this month. Laurent said he believes CPP will accelerate subscriber growth and usage.
“Iusacell is probably the company where looking at (average) revenue per minute rather than (average) revenue per user … leads to the most interesting conclusions,” the DLJ report said.
At first glance, it is easy to infer that low ARPU is the cause of Iusacell’s failure so far to report positive operating income. Furthermore, the advent of new PCS competition would seem likely to aggravate the decline in ARPU and therefore stymie potential profitability.
“We do not agree with this view … (because Iusacell’s) average revenue per minute in 1998 was US48 cents, which compares well with international benchmarks,” Laurent said.
“Iusacell’s problem comes from lack of calling party pays and the associated lack of traffic per user in the current system.”
In all of Mexico, customers average 80 minutes of use per month. Iusacell’s network is capable of handling, with minimal investment, twice or three times the traffic it now receives, Laurent said.
