Patrick Brennan of Brennan Asset Management presented his in-depth investment thesis on Megacable (Mexico: MEGACPO) at Best Ideas 2020.

Thesis summary:

Megacable (Mega) is the second-largest high-speed cable company in Mexico, with ~3.6 million unique subscribers. While operational performance has continued to be strong, Mega shares have sold off along with other Mexican assets following the election of Andrés Manuel López Obrador in 2018. The selloff has occurred despite a neutral to positive telecom regulation environment for Mega.

Historically, Mega has traded for 8-10x EBITDA, but Mega recently traded at ~6x 2020E EBITDA. At the highest level, Mega shares look attractive relative to the company’s pristine balance sheet (net debt of 0.4x 2019E EBITDA and the company has often carried positive net cash balances historically), consistent execution, and double-digit projected EBITDA growth from 2018-2020.

Mega should benefit from increases in broadband penetration rates, continued growth of its fiber network, and a robust commercial offering. Broadband penetration rates are ~65% within Mega’s footprint, with Megacable estimating penetration rates expanding to 74% over the next five years. Mega has generally been expanding the numbers of homes passed by 4-5% over the past three to four years using existing city fiber rings within its footprint as well as additional passings less than ten kilometers from existing towns.

Mega has also benefited from increased bundling of services. The company targets a ratio of 2.5x revenue generating units per customer over the medium term. This bundling, combined with price increases and value-added product up-sales, has allowed for recent 3-4% increases in average revenue per user. Megacable also benefits from a robust commercial offering, which accounts for 18% of revenue, with the largest sub-segment roughly tripling revenue over the past three years. Commercial revenue could expand at a 15+% CAGR over the next three to five years.

A strong possibility exists of a Megacable takeout within the next several years. Rumors of a Televisa/Megacable merger have existed for some time, and the companies could argue a combined company would be better-positioned to compete against incumbent América Móvil. Mega could also attract interest from other companies who would like to enter Mexico’s cable market and use a deal to expand scale against a wider Latin America offering. Considering the growth profile, balance sheet strength/inefficiency, strategic importance of the asset base, and low relative/absolute valuation levels, the risk/reward in Mega shares appears highly favorable.

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About the instructor:

Patrick Brennan is the founder and portfolio manager of Brennan Asset Management, LLC (BAM), a Registered Investment Advisory firm based in Napa, CA, which utilizes a concentrated value investing strategy. BAM manages separate accounts and is the sub-adviser for the Oceancross Capital Partners Fund. Patrick has given presentations at multiple value investing conferences, including presentations to The New York Society of Security Analysts (NYSSA), The Nebraska Society of Securities Analysts and presentations on various names at the VALUEx Vail Conferences. Patrick coauthored an article on tracking stocks with Lawrence Cunningham for The Financial History Magazine and Patrick was featured in a write-up of Liberty LILAK in The Private Investment Brief. Prior to founding Brennan Asset Management, Patrick managed portfolios and led research efforts at two value investing firms in California: Hutchinson Capital Management and RBO & Co. Previously, Patrick worked at Mark Boyar & Company, where he led the firm’s research team and helped manage $800 million of assets across individual portfolios, institutional accounts and a mutual fund. Patrick also worked for six years in investment banking and equity research with Deutsche Bank, CIBC World Markets and William Blair & Company. Patrick graduated summa cum laude from the University of Notre Dame with a degree in economics and was inducted into Phi Beta Kappa. Patrick received the Chartered Financial Analyst (CFA) designation in 2002 and is a member of the CFA Institute (formerly AIMR). Patrick is originally from Omaha, Nebraska.