Compelling Media/Distribution Investment Opportunity in Mexico - Grupo Televisa

Business Introduction:

Grupo Televisa is a leading media company in the Spanish-speaking world, an important cable operator and Satellite TV provider in Mexico. The company classifies their operations into four business segments: Content, Sky, Cable and other businesses.

Grupo Televisa also distributes the content it produces through several broadcast channels in Mexico, 26 pay-tv brands in Mexico and abroad, and television networks, cable operators and over-the-top or “OTT” services in over 50 countries.

In the US, Televisa's content is distributed through Univision Communications Inc. ("Univision"), the leading media company serving the Hispanic market. Univision broadcasts Televisa's content through multiple platforms, in exchange for a royalty payment. In addition, Televisa has equity and warrants represent approximately 36% on a fully-diluted. Univision Television Group owns 59 television stations in major U.S. Hispanic markets and Puerto Rico.

Grupo Televisa owns a 58.7% interest in Sky, a leading direct-to-home satellite pay television system in Mexico, operating also in the Dominican Republic and Central America.

Grupo Televisa cable business offers integrated services, including video, high-speed data and voice services to residential and commercial customers as well as managed services to domestic and international carriers through five cable Multiple System Operators (MSO) in Mexico.

Grupo Televisa also has interests in magazine publishing and distribution, radio production and broadcasting, professional sports and live entertainment, feature-film production and distribution, and gaming.

Here is each of the divisions’ business nature and economics.

Cable/broadband Division:

Cable/broadband division is the crown jewel of the business, especially the broadband internet division under the cable division. Cable division generates 39% of revenues and 43% operating income for the company. The economics of this division is wonderful once the cable is laid out in a particular region/buildings and a few customers are signed up, it becomes monumentally difficult for a competitor to do the same and split the revenues and cash flows with an existing competitor and also earn a decent rate of return. For that reason, the first mover cable business becomes a monopoly in the region it operates and enjoys good returns on capital for a long period of time.

This division has a subscriber base of 4.3M video customers, 4.7M broadband internet customers and 3.6M telephony customers against more than 14M homes passing in Mexico. Televisa Cable business captures 22.5% of data customers in Mexico, compared to 16% at the end of 2014. Mexico has just over 52% penetration of data services, which is one of the lowest in Central American developed countries. Most of the customers subscribe to Izzi’s least expensive data plan. Televisa Cable segment offer includes multiple high-speed data plans for residential customers at 10, 20, 50 & 100 Mbps and for business customers at 25, 50, & 100 Mbps.  As adoption of broadband data usage through hand held devices such as tablets and smart phones and TV increases, cash flows increase for Televisa Cable over time.

Cable segment has unusual economic characteristics: It takes lot of initial capital to lay down the fiber or coaxial and fiber(hybrid) cable to home. Initial consumption/adoption of subscribers brings in small revenues relative to the operating expenses. As the subscriber count increases, the expenses don’t increase at the same rate. As operating leverage kicks in over 40% penetration, the company starts to make incredible amount of returns on capital at that time. So, there is a clear lag of about 3-5 years for that extraordinary returns on capital to materialize. Until then the financials of the division look rather ordinary. The initial years’ operating expenses and depreciation masks the true potential of the business by a large magnitude.

One can see the revenue growth of more than 46% in the last 5 years and operating income of more than 56% in the below table.

Here are the segment historical financials:

                                                                                                                                                                   (In Ps. Millions)

	2019	2018	2017	2016	2015
Revenues	41,702	36,233	33,048	31,892	28,488
Earnings from operations	17,798	15,303	14,035	13,236	11,406

Content programming and Advertising Division:

Content division generates 37% of revenues and 39% operating income for the company. Among the content division, the advertising derives 64%, Licensing and Syndication brings in 25% while Network subscriptions brings in remaining 11%. The content division used to be a larger percentage of revenues and cash flows just over 7 years ago, its importance and contribution has declined as the cable/broadband division became larger.

Televisa also earns royalty incomes of 16.45% of total revenue from 'Univision USA' by supplying the content. The content is just an extension of whatever they already produce for their own market in Mexico and other Spanish speaking world.

Televisa’s content division used to be a monopoly in Mexico in terms of viewer time spent where the linear TV dominated the in-home entertainment. This position has slowly waned as the linear TV and TV advertisement has slowed due to the online streaming and other advertisement avenues. This is still a good division in terms return on of invested capital employed. They are in transition from linear TV to OTT to their natural audience. Every other year (2014,2016,2018), the Olympics and World cup Football brings in increasing revenues and cash flows. This year 2020 supposed to be an Olympics year, now Covid-19 delayed that prospect.

Here are the segment historical financials:

                                                                            

                                                                                                                                                                 (In Ps. Millions)

	2019	2018	2017	2016	2015
Revenues	34,796	39,224	33,997	36,687	34,333
Earnings from operations	12,632	14,855	12,825	14,748	14,564

Sky satellite Division:

Televisa has 58.7% ownership in ‘Sky’, a venture with DIRECTV. Sky has more than 7.5M subscribers. Satellite division generates 18% of revenues and operating income for the company. Satellite division produces great amount of cash flows on their invested capital. It lacks the reinvestment opportunities given the TV penetrations in Mexico and Dominican Republic. These cash flows are utilized in other growing divisions within the company. They are also developing their own satellite broadband business picking up subscribers quickly reaching more than 200,000 within a year.

Here are the segment historical financials:

                                                                                                                                                                   (In Ps. Millions)

	2019	2018	2017	2016	2015
Revenues	21,347	22,002	22,197	21,941	19,254
Earnings from operations	9,121	9,767	10,107	9,899	8,972

                                                               

Other Division:

There are numerous businesses other than the above listed historically developed, acquired that produces cash flows although they are smaller size of the total pie in Televisa. Here are some of them:

Publishing: Televisa publishes 136 magazine titles in 15 countries.

Gaming: Play City, Televisa’s casino business, includes 17 sites across the country with close to 6,500 Electronic Gaming Machines. Multijuegos, Televisa’s lottery business, includes both retail and digital products.

Soccer: A first division soccer team of the Mexican league and owner of Mexico’s Azteca stadium.

Radio: As an important participant in Spanish-language radio in Mexico, Televisa broadcasts news, music, and talk show programming through a network of 99 radio stations. Of these stations, 17 are owned and 82 are affiliates owned by third parties.

Feature-Film Distribution: Distributes movies in Mexico and Latin America.

This ‘Other’ division generates about 8% of revenues and 1% operating income for the company. This segment has been getting streamlined for the last few years as the 3 core segments are getting more attention and resources.

Here are the segment historical financials:

                                                                                                                                                                (In Ps. Millions)

	2019	2018	2017	2016	2015
Revenues	8,200	8,636	8,376	8,828	8,124
Earnings from operations	1,464	754	490	1,041	753

Consolidated Historical Financials:

The below table gives the consolidated view of Televisa. Maintenance capital expenditure line is my estimate based on the depreciation schedule and comparing other industry standards.      

                  (In Ps. Millions)

	2019	2018	2017	2016	2015
Revenues	101,492	101,282	94,274	96,287	88,052
Operating Cash flow	41,015	40,679	37,457	38,923	35,695
Interest Expense	10,402	9,707	9,246	8,498	6,239
Maintenance Capex	13,500	13,500	13,000	12,000	11,000
Free Cash Flow	17,113	17,472	15,211	18,425	18,456
Cash and Equivalents	27,452	38,654	38,735	47,546	49,397
Total Assets	290,422	297,842	297,220	309,054	281,474
Debt	120,445	121,972	121,993	126,147	107,431
Net Debt	92,993	83,319	83,258	78,601	58,034
Stockholders’ Equity	90,627	89,711	85,662	83,792	87,383

                                                                                            

         

                

Conservative balance sheet:

Total debt (Q4 2019): Ps$120.4 billion

Financial Assets: Ps$27.4 billion

Net debt: Ps$93 billion

Average maturity: 14.71 years

Net Debt / EBITDA Ratio 2.2x                                                                                       

Valuation:

I have taken a few ways to highlight the value of the company. I also made the valuation numbers in USD. 1 USD = 24 Mexican Peso

As of May 2020, multiples:

Stock Price (ADR) ~ $5/share; Shares Outstanding – 585 Million;

Market Cap ~ $3 Billion

Pre-tax Free Cash flow – $ 0.71B

Price/ Pre-tax Free Cash flow ~ 4.28 times or 6 times of after-tax free cash flow

Conservative Parts valuation:

Content division:

10 times Operating earnings – $5B

Univision Ownership:

This unit’s valuation is subject to lot of assumptions as the future of this division doesn't seem robust given the trend in this business. News reports have indicated the valuation of $9B - $20B based on the planned IPO process until late last year. Even in the low end, the equity will be worth more than $3B given their $6B debt load. It makes this unit ownership (36%) worth more than $1B.

Univision - $1B

Total Content division – $6B

Sky satellite Division:

Operating earnings - $223M (58.7% ownership)

10 times Operating earnings – $2.2B

Cable Division:

Operating earnings - $741M

12 times Operating earnings – $8.9B

Other Division:

Sales - $466M

2 times sales ~$1B

Total Enterprise Value – $18.1B

Net Debt – $4.4B

Net Equity Value – $13.7B or $23.4/share

Another way – Potential Cumulative profits in next 5 years:

I believe the company will generate $4B to $5.5B in cumulative after-tax profits in next 5 years based on conservative assumptions from here, which is 130% to 165% of the company’s market cap today. That will either be kept in the balance sheet or reinvested in profitable assets or distributed via dividends and or stock repurchases. If they elect to buy back the shares, they can retire all of the shares outstanding 😊.

If one wants to look at the individual divisions to be separate businesses listed, each division can command a valuation equal or more than the current market cap of the whole company.

Catalysts:

·      Capital Investment intensity is reducing after years of cable investments, hence the free cash flow acceleration.

·     Televisa has been selling non-core investments to focus on core businesses; it had sold the Spanish media and communications company ‘Imagina Media Audiovisual’ for more than $350m early last year.

·     John Malone’s Lieutenants Mike Fries, David Zaslav and Jon Feltheirmer have been on board since 2015 and have been exploring options to increase the shareholder value including separating the business divisions.

Risks:

·     General economic downturn may hinder the growth of the business as the content/ad-revenue business is cyclical especially given the Covid-19 crisis now.

·    Macro-economic uncertainty can create less-fruitful relationship with major trading partner US and their US based investments holdings.

·    Mexican Peso devaluation against USD may produce an unfavorable result for US investors although the business and stock value reflect the reality over time.

Summary:

·     Highly profitable business with high return on Invested capital, the ability and opportunity to re-invest the profits at attractive ROI, the management is both capable and shareholder friendly co-owners.

·     The business is selling in the market currently for 6 times of it’s after tax free cash flow.

Disclosure: I own a significant position in shares of Televisa.

Attractive Opportunity To Participate In Indian Business Growth Story Long Term! - Fairfax India (TSE:FIH.U)

Introduction:

Fairfax India Holdings Corporation (FIH.U or FFXDF) is an investment holding company publicly traded on the Toronto Stock Exchange whose investment objective is to achieve long-term capital appreciation, while preserving capital, by investing in public and private equity securities and debt instruments in India. Fairfax India was founded in 2014 and is headquartered in Toronto, Canada. Its common shares are listed on the Toronto Stock Exchange under the symbol FIH.U.

Fairfax Financial Holdings Limited is the controlling shareholder of Fairfax India. Fairfax Financial Holdings Limited is a Toronto based financial services holding company with a global presence in insurance and reinsurance and a portfolio of assets invested worldwide. Fairfax Financial Holdings Limited is listed on the Toronto Stock Exchange under the symbol "FFH". Prem Watsa is the chairman of both Fairfax Financial Holdings and Fairfax India.

All the investments of Fairfax India are centrally managed by Hamblin Watsa Investment Counsel Ltd. (www.hwic.ca), a wholly owned subsidiary of Fairfax Financial Holdings Limited (www.fairfax.ca). Fairbridge Capital Private Limited (www.fairbridgecapital.com), a wholly owned subsidiary of Fairfax Financial Holdings Limited, is sole advisor to HWIC with respect to investments of Fairfax India.

Ownership / Current Holdings:

The following table from the annual report identifies all the investments with the details such as the acquisition price, current carrying value and the date of investment.

I will detail the top 2 holdings as I believe they constitute half of the capital invested and they will likely drive large value over time. I will detail the other investments in another follow up article.

Bangalore International Airport (BIAL):

Bangalore Airport is one of the modern international airports in India, privately held, has a passenger capacity of 20 million and latest count passenger pass through of over 33 million in 2019.  In 2018, BIAL entered a phase of significant investment of about $1.9 billion to expand its designed capacity of 20 million passengers to about 50 million in 2021 by re-configuration and system improvements in the existing terminal, building a second runway and building phase one of a second terminal and associated supporting infrastructure. The second runway was commissioned as planned in 2019, and significant progress has been made in the construction of phase one of the second terminal, which is expected to be completed in 2021. A financing plan for this expansion, based on a debt to equity ratio of 80:20, has been approved by a syndicate of Indian banks at attractive interest rates. Plans have also been adopted for the building of phase two of the second terminal and related infrastructure for an incremental investment of about $1.2 billion to take the capacity to about 70 million passengers by 2028. BIAL has three potential sources of revenue.

Aero Revenue:

Aero revenue, which has grown at a CAGR of 16% from 2009 to 2019, is the revenue earned for providing services such as landing, parking and other services charged as user development fees to airlines and passengers.

Non-aero Revenue:

All revenue other than aero revenue, such as revenue from cargo handling, ground handling, fuel sales, food and beverage sales and duty-free shops, constitutes non-aero revenue. Non-aero revenue has grown at a CAGR of 17% from 2009 to 2019 and is expected to grow substantially due to an increase in passenger growth rates, the availability of additional space and the increasing propensity of passengers at the airport to make purchases. BIAL has undertaken many innovative projects that engage passengers and enhance their experience at the airport.

Real Estate Monetization: 

BIAL has approximately 460 acres of land adjoining the airport that can be developed. All this land is undeveloped except for a small piece on which BIAL has built a hotel, currently operated by the Taj hotel brand under a management contract. Bangalore’s historical population areas are getting congested, so the city is expanding in the airport’s direction. BIAL anticipates significant upside, over time, from monetization of this real estate.

Some of the high-level plans for monetization of the real estate are listed below:

• A 100% owned special purpose vehicle (SPV) subsidiary of BIAL was incorporated to carry on the real estate activities of BIAL.

• The Board approved the terms and conditions under which the land to be developed will be leased by BIAL to the SPV and the financial plans covering the first phase of developing approximately 176 acres.

• The first development will be a 775 room 3- and 4-star combination business hotel situated on approximately 5 acres of land. The project has been awarded to the Taj Group of hotels and will be owned 100% by the SPV.

• The second development will be a retail, dining and entertainment village on approximately 23 acres of land. This project will also be 100% owned by the SPV and will be developed in phases.

• The third development will be business parks over approximately 130 acres of land that will be jointly developed in phases through a combination of land lease, joint development and own development models. In addition, approximately 12 acres of land will be used for the development of an outlet mall and a 5-star hotel.

• A first of its kind large concert arena in the region, on approximately 6 acres of land, has been awarded to a consortium and is expected to be completed in 2021. Live Nation, a global entertainment company, will act as the consultant to the consortium on the development of the project.

Valuation:

Cost Basis:

Fairfax India has invested $653 million in total to acquire 54% of BIAL, implying an equity value of approximately $1.2 billion for the whole company.  Based on BIAL’s December 2019 IFRS financial statements, the blended purchase price valued BIAL at a price earnings ratio of 9.7 times, a price to BVPS ratio of 3.2 times and a price to free cash flow ratio of 8.4 times. 

Carrying Basis:

The increase in the valuation of Fairfax India’s investment in BIAL to $1.4 billion (implying a valuation of $2.7 billion for 100%) is supported by future cash flow estimates (akin to DCF). In addition, In June 2019, Fairfax India created a 100% owned subsidiary in India named Anchorage Infrastructure Investments Holdings (AIIHL). It is intended that this company will be Fairfax India’s flagship investment vehicle for airports and other infrastructure investments in India and that all of the shares it owns in BIAL will eventually be transferred to AIIHL.

Later in 2019, Fairfax India signed definitive agreements with an investor (Canadian pension plan OMERS) whereby it will transfer 43.6% of BIAL out of the 54% that it owns in BIAL to AIIHL and the investor will pay about $135 million to acquire from Fairfax India an 11.5% interest on a fully diluted basis in AIIHL. This will result in the investor indirectly owning approximately 5% of BIAL. The transaction values 100% of BIAL at $2.7 billion. Fairfax India intends to complete an IPO of AIIHL, targeted to value 100% of BIAL at $3.0 billion (a targeted valuation of $1.3 billion for 100% of AIIHL).

IIFL Holdings:

In 2019, IIFL holdings split into 3 separately publicly listed companies. I will highlight some of their business operations and current valuation as these businesses are carried on the balance sheet based on the public market prices.

IIFL Finance:

Based on total revenue, IIFL Finance, which is non-deposit taking, is the 22nd largest NBFC (Non-Banking Financial Corporation) in India. Under the able leadership of its CEO, Sumit Bali, IIFL Finance is moving forward aggressively to consolidate its position as one of the major NBFCs in India. It added 504 new branches in 2019, taking its total to over 2,350 branches, with over 18,000 employees and 3 million customers.

In 2019, IIFL Finance revenues increased 15% to $363 million and profit after tax excluding extraordinary items increased by 17% to $103 million, generating a ROE of 15%. Despite these good results, IIFL Finance is trading at a deeply discounted valuation of only 4 times price to estimated March 2020 earnings and price to estimated March 2020 book value of 0.7 times.

IIFL Wealth:

IIFL Wealth is the number one wealth manager in India for Ultra High Net Worth Individuals with consolidated total assets under management (AUM) of $25.1 billion, 29 offices in India and abroad, 900 plus employees and 64 teams consisting of 288 relationship managers serving over 5,600 families.

As part of the IIFL Holdings group, IIFL Wealth was its fastest growing business, having compounded 5-year growth rates of 32%, 39% and 49% in, respectively, AUM, total revenue and profit after tax. IIFL Wealth has two businesses – wealth management (the larger one) and asset management.

The wealth management business has embedded in it a non-bank finance company (NBFC) which makes loans to its clients secured by their assets held by IIFL Wealth and has never had a bad loan.

The smaller asset management business is India’s leading manager of alternate investment funds (AIF). AUM for this business grew by 46% in 2019 to $3.8 billion while revenues grew by 78% to $18 million. This business was strengthened by the addition of a new CIO, Anup Maheshwari, an experienced fund manager with a proven 25-year track record.

Currently, the stock traded at a valuation of 28 times March 2020 expected earnings and its market capitalization was 5% of its AUM, reflecting the market’s confidence in its growth prospects. Given the low penetration of wealth management in India and the high rate of wealth creation and growth in dollar millionaires, I believe that IIFL Wealth has a very bright future.

IIFL Securities:  

                      

IIFL Securities is one of the major capital market players in Indian financial services. It offers advisory and broking services (both retail and institutional), financial products distribution, institutional research and investment banking services. It operates in over 2,500 locations across India, comprised of a wide branch and sub-broker network providing unparalleled research coverage on over 200 companies. It serves over 800,000 customers and has a strong online presence. Mobile trading has significantly aided in increasing the number of customers: mobile trading clients in 2019 accounted for 54% of trading. IIFL Securities was founded in 1996 and became a member of the Indian stock exchanges in 2000.

It also owns a portfolio of commercial properties, rented mostly to group companies, with a current market value of about $100 million (amounting to about 66% of its market capitalization), that generates rental income of approximately $7.5 million. These assets may be monetized in the future.

At 35 rupees per share, implying a price to earnings ratio of 4.7 times 2019 earnings and a price to book value ratio of 1.4 times. Over the last four years IIFL Securities has generated an average ROE of 29%

Valuation of Fairfax India:

On May 7th, 2020, Fairfax India has ~153M shares outstanding. Based on the market price of ~$8/share, the company is trading for $1.2B. The company has about $460M in net debt. It is a deep discount relative to even a purchase price accounting valuation of $1.8B or less than half of the carrying value of their portfolio. Another way to look at this valuation, It is less than the carrying value of the airport alone. If we assume the carrying value of the BIAL is appropriate (I vote ‘Yes’), we are getting all the other assets for free today. This is a very highly attractive way of participating in Indian business ownership through Fairfax India.

Risks:

Investing in any company comes with its own set of risks; it's up to us to determine whether we are getting paid to take on those risks? Here are some of the risks that the potential shareholder should be aware of.

• Indian currency (Rupee) has depreciated against dollar for years, this may continue as more people believe the USD is a safe haven relative to Rupee.

• Indian economy may not rebound as quickly and growth may linger slower for longer.

• Management has an incentive fee structure based on performance (similar to a good hedge fund incentive, which I endorse) may take away some benefits from shareholders although they own third of the company themselves.

Disclosure:

I own a significant stock position in Fairfax India. I wrote the article myself although I used plenty of language/materials from their annual and quarterly reports.

1st Quarter 2020 Letter

Here is the link for the 1st Quarter 2020 Letter from GB Investments!

2019 Annual Letter

Here is the link for the 2019 Annual Letter from GB Investments!

3rd Quarter 2019 Letter!

Here is the link for the 3rd Quarter 2019 Letter from GB Investments!

2nd Quarter 2019 Letter!

Here is the link for the 2nd Quarter 2019 Letter from GB Investments!