Megacable’s Pricey Valuation Spurs Itau to Recommend Selling

Megacable Holdings SAB’s stock keeps touching record highs as Mexico’s second-largest cable provider continues to add customers. Itau BBA says the price gain isn’t sustainable.

Megacable is expensive compared with peers and heightened competition could lead to cheaper Internet, landline and pay-TV plans -- and smaller margins, Itau analyst Gregorio Tomassi said in a note to clients last week. He has a target price of 60 pesos for the company, implying an 11 percent drop from its current price. Tomassi is the only analyst among 14 tracked by Bloomberg to advise the equivalent of selling the stock.

Rules signed into law last year increased competition among pay-TV, phone and Internet operators, including America Movil SAB and Grupo Televisa SAB, which have cut prices to vie for new customers. Megacable benefited from regulation that forced broadcasters Televisa and TV Azteca SAB to offer their most popular channels for free and banned billionaire Carlos Slim, who controls America Movil, from entering the pay-TV business.

“Megacable is a company that has a great balance sheet and is growing, but it’s a matter of valuation and the opportunity is there,” Tomassi said in a phone interview from Mexico City. Acquisitions rumors that had been propping up the stock now seem less likely, he said.

High Valuation

Current valuation levels “leave little upside potential,” Barclays Plc analyst Gilberto Garcia said in a report last week. Megacable’s price-to-earnings ratio of 23.5 compares with a North American average of 20.7.

Megacable shares have already jumped 17 percent this year to 67.48 pesos as of the close on May 6, more than quadruple the 4 percent gain in Mexico’s benchmark-index. Of the analysts tracked by Bloomberg, seven, including Garcia, recommend holding the shares and six advise buying them.

A representative of Guadalajara-based Megacable contacted for comment didn’t have an immediate response to the analysts’ recommendations.

Megacable, once thought to be a Televisa takeover target, is running out of options to expand through acquisitions in Mexico, Tomassi said. Televisa pre-empted the company with its purchase of Grupo Hevi’s Telecable in January. For years, Megacable had openly expressed interest in Hevi.

That purchase came just months after Televisa bought Cablecom, which ranked among the country’s few remaining large and independent pay-TV providers. Televisa now serves about 64 percent of the 15.7 million pay-TV subscribers in Mexico, compared with Megacable’s 15 percent, according to data from Mexico’s telecommunications regulator, known as IFT.

Getting Ahead

Televisa’s moves “were not only made to consolidate, but to get ahead of Megacable,” Tomassi said. “Now Televisa has no rush to acquire Megacable, and Megacable has almost no one else to acquire in Mexico.”

Billionaire Emilio Azcarraga’s Televisa offers pay-TV services through units including the Sky satellite service and rebranded cable provider Izzi, which has lured customers with bundles including Internet service and unlimited calls starting at 400 pesos ($26) a month. America Movil’s Telmex also cut prices to about 330 pesos from 390 pesos for an Internet and landline bundle.

Megacable can sustain growth without acquisitions, Carlos de Legarreta, an analyst at Corporativo GBM SAB, said by phone from Mexico City. He recommends buying the shares and increased his target price this week to 70.5 pesos from 65 pesos.

First-quarter sales climbed 24 percent to 3.3 billion pesos and Internet subscribers increased by a net 123,000, Megacable reported last week.

Return on Assets

“What’s surprising about them is their capacity to grow without sacrificing the quality of subscribers,” Legarreta said. The company has expanded successfully and has been able to offer multiple services to a larger amount of clients, he said.

Compared with its North American peers, Megacable has the second-highest return on assets, behind DirecTV, according to data compiled by Bloomberg. As of May 6, the company’s market value was about $3.78 billion.

Televisa, Mexico’s largest cable provider, is under IFT investigation for having “substantial power” in the pay-TV market, setting the broadcaster up for potential sanctions. A ruling on the matter is expected this month, according to the company.

A Televisa press official didn’t respond to a request seeking comment.

“The competition we have with them is fierce,” Luis Zetter, Megacable’s chief financial officer, said on a call with analysts this week.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE