Business Context and Reporting Period
Company: Millicom International Cellular S.A.
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2004
Business Overview: Millicom is a global mobile telecommunications operator with interests in 17 cellular systems across 16 emerging markets in South East Asia, South Asia, Central America, South America, and Africa. The company focuses on prepaid services and mass market distribution. As of December 31, 2004, the company had 7.7 million total subscribers (5.3 million on a proportional basis).
Key Financial Metrics (IFRS)
| Metric | 2004 | 2003 | Change |
|---|---|---|---|
| Revenues | $921.5 million | $647.1 million | +42% |
| Operating Profit | $248.9 million | $162.5 million | +53% |
| Net Profit | $68.2 million | $178.8 million | -62% |
| Basic EPS | $0.82 | $2.74 | -70% |
| Total Debt | $1.11 billion | $1.17 billion | -5% |
| Cash & Equivalents | $413.4 million | $148.8 million | +178% |
| Operating Cash Flow | $303.2 million | $184.3 million | +65% |
Note: Net profit volatility is driven by valuation movements on investment securities (Tele2 AB shares) and fair value results on financial instruments.
Material Changes vs. Prior Period
- Subscriber Growth: Total subscribers increased 36% to 7.7 million, driven by growth in Vietnam, Ghana, Tanzania, and Pakistan. Prepaid subscribers now represent 87% of the total base.
- Revenue Drivers: Revenue growth was fueled by subscriber expansion and the full-year consolidation of the El Salvador operation (Telemovil), which was reconsolidated in September 2003. Central America revenue grew 84% and Africa 77%.
- Profitability Decline: Despite a 53% increase in operating profit, net profit fell 62% due to a $127 million valuation loss on Tele2 AB shares (compared to a $247 million gain in 2003) and a $149 million gain on the embedded derivative of the 5% Mandatory Exchangeable Notes.
- Divestitures: Sold its 65% interest in Millicom Argentina S.A. in September 2004, realizing a loss of $2.1 million. Plans to exit the Peru operation are ongoing.
- Capital Structure: Issued 9 million shares in December 2004, raising $209 million in equity. In January 2005, issued $200 million in 4% Convertible Bonds.
Guidance, Outlook, and Risks
- Vietnam Expiration Risk (Critical): The Business Cooperation Contract (BCC) for the Vietnam operation (Mobifone), which contributed 18% of total revenue and 27% of operating profit in 2004, expires on May 18, 2005. Negotiations for a Joint Stock Company structure are ongoing but no agreement is guaranteed. If not extended, revenues from Vietnam will cease, and a $16.6 million impairment charge was already recorded in Q1 2005 for assets that will transfer to the partner for $1.
- Liquidity and Debt: The company maintains substantial debt ($1.11 billion). While a 2003 restructuring reduced interest obligations, the company faces significant debt service requirements. A shareholder vote on May 31, 2005, is required to determine whether to continue operations or dissolve the company due to accumulated losses exceeding half of subscribed share capital under Luxembourg law.
- Regulatory and Political Risks: Operations in emerging markets face risks related to license renewals (e.g., Pakistan license fees of $291 million), currency devaluation, and political instability. The company does not hedge foreign currency exposure.
- Outlook: Management expects continued growth in subscriber bases and operating profitability, driven by low penetration rates in target markets and migration to GSM technology. However, future results are heavily dependent on the resolution of the Vietnam contract and the ability to manage debt levels.
Investor Verification Checklist
- Vietnam Contract Status: Verify the outcome of negotiations between Comvik International (Vietnam) AB and Vietnam Mobile Services Co. regarding the post-May 2005 operating structure.
- Shareholder Vote: Confirm the result of the May 31, 2005, shareholder meeting regarding the continuation of the company's business under Luxembourg law.
- Tele2 AB Valuation: Monitor the market price of Tele2 AB shares, as fluctuations directly impact Millicom's reported net income through fair value adjustments.
- Debt Covenants: Review compliance with financial covenants in the 10% Senior Notes indenture, particularly the leverage ratio (net debt to 4x operating income).
- License Renewals: Track the finalization of license renewals in Pakistan (Pakcom and Paktel) and the associated $291 million fee payments.