Guidance looks achievable, but reducing to
Neutral on 3G overhang
■
After the strong market reaction to 1Q09 results yesterday (shares
+14%), we are reducing our rating on NIHD from Outperform to Neutral.
We believe the company can maintain strong growth rates and meet its
2009 Ebitda guidance, but we are more cautious on the shares as NII
heads into an investment cycle to overlay WCDMA (3G) to complement
its existing iDEN network. Our view is that the shares are less
attractive at the current price once adjusting for potential outlays for
3G spectrum and infrastructure.
■
3G opex. In Peru, the only market where NII has already chosen suppliers
and started to overlay 3G, Ebitda margins declined from 21% to 14% y/y in
1Q09, partially due to 3G opex. We believe higher opex will also be a risk to
margins over the medium-term when the company prepares to launch 3G in
other markets. The timing of these launches is dependent on the availability
of spectrum from regulators, but we believe this should be a greater risk over
the next 12-18 months.
■
Spectrum. We are assuming in our NII model an outlay of US$750mn to
acquire 3G spectrum licenses at the end of 2009. Although auction timing
could slip, we believe further delays would be mixed news for NII. The
company has been successful in maintaining its strong competitive position
and gaining postpaid market share with its iDEN network, so far. But, we are
concerned that the lack of a 3G offering, especially to corporate clients,
could become a greater risk in coming quarters as NII’s larger competitors
expand their smartphone and 3G offerings

We are reducing our twelve month target price from US$30 to US$20 per share for two
factors. First, we are trimming US$3/share because of a more cautious outlook on growth
in light of reduced subscriber guidance earlier this month and weaker than expected
margins in 1Q09. Second, we are trimming US$7/share to account for potential value
destruction from the rollout of 3G. We have incorporated incremental capex of US$1bn
into our model for 3G, spread across 2010 and 2011. Once licenses become available, we
believe NII will push ahead with its 3G build promptly because of (i) coverage
requirements embedded in the licenses, (ii) the need to offer more competitive data
services, (iii) the need for a more extensive handset portfolio, and (iv) the appeal of
diversifying equipment vendors