Earnings Report /
Mexico

Axtel: AXTEL, Quarterly Report 1Q21: Surprising weakness in Government

  • Axtel reported below expectations, as the 13.1% drop in revenues from Alestra offset Infrastructure's growth

  • Conversations to attract potential investors continue, focused on Axtel Networks; no further progress in this regard

  • Although the timing of the sale is unclear, we continue to believe that it should trigger the company's intrinsic value

Valentin III Mendoza Balderas
Valentin III Mendoza Balderas

Senior Equity Research Analyst, Consumer & Telecoms

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Juan Barbier
Juan Barbier

Equity Research Analyst

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Banorte
21 April 2021
Published byBanorte
  • Axtel reported below expectations, for which we expect a negative reaction, as the 13.1% drop in revenues from Alestra (Government:     -36.9%) offset Infrastructure's growth

  • Conversations to attract potential investors continue, focused on Axtel Networks, with no further progress in this regard, and while the CPO performance will depend on how it evolves

A start of the year with significant declines. Axtel's figures reflected a more challenging start of 2021 than anticipated, mainly in the Government segment (-36.9% y/y), due to the termination of contracts with federal entities. Likewise, a lower voice demand due to remote work offset growth in cybersecurity and cloud solutions, such that Enterprise segment sales fell 6.7% y/y and those of Alestra fell 13.1%. On the other hand, dark fiber prepaid contracts and lower intercompany eliminations boosted Infrastructure's net revenues by double digits. As a result, consolidated revenues contracted 8.7% y/y to MXN 2.835 billion. Meanwhile, in the absence of the MXN 2.021 billion extraordinary income from its data center sale in 1Q20, EBITDA plunged 69.2% y/y to MXN 916 million. However, on a comparable basis, EBITDA would have fallen 4.0% with a 160bps margin expansion, reflecting a higher contribution from Axtel Networks. Finally, despite a 71.6% decrease in CFC due to lower FX losses, and a tax benefit, at net level the company reported a loss of MXN 286 million.

Valuation became more expensive, although still not reflecting the value of Infrastructure. Following the report, FV/EBITDA LTM rose to 6.8x from 4.5x previously, due to EBITDA normalization after the aforementioned extraordinary income and which, despite the q/q MXN 1.038 billion debt payment, increased leverage to 3.0x ND/EBITDA vs. 1.9x in 4Q20. However, although the timing of the sale is unclear, we continue to believe that it should trigger the company's intrinsic value.