Smart portfolio changes add to the appeal of this undervalued narrow-moat company.
By Allan C. Nichols, CFA | 03-06-17 | 07:25 AM | Email Article

 Millicom  announced it has agreed to merge its Ghanaian operation with Bharti Airtel's into a 50/50 joint venture. The combined company will be the second-largest wireless operator in the country, moving ahead of Vodafone but still trailing MTN. While we are pleased to see this merger, we are maintaining our fair value estimate and narrow moat rating. We believe Millicom remains undervalued, and it is one of our favourite telecom names.

Allan Nichols, CFA, is a senior equity analyst for Morningstar.

Millicom significantly improved its margins and returns on capital in Africa in 2016, which we expect to remain a focus. This merger should provide further gains as in-country consolidation almost always improves profitability because duplicate costs can be removed. Additionally, it increases the network coverage of the company in Ghana, which will now cover 80% of the population with a 3G network. It also begins the consolidation of wireless operators. Currently, there are six wireless operators in Ghana, which we believe is too many; operators don't have sufficient scale to be profitable and absorb the needed costs to improve the quality of their networks. We hope this leads to further consolidation in Ghana. Many African countries have too many operators and need to see consolidation.

This move follows Millicom's sale of its Senegalese business in February 2017 and Democratic Republic of Congo operation in 2016 to Orange, which helps consolidate that country's market. We continue to believe Millicom's management will first focus on improving returns in Africa but will sell operations that it can't turn around or is offered a high price for due to another operator's ability to extract more value. We are happy to see these portfolio changes and management's moves to improve profitability in Africa.

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Allan C. Nichols, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.
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