JPM_Maxcom_Telecomunicac_2011-05-03_587668

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Latin America Credit Research

02 May 2011

Maxcom Telecomunicaciones

SA OW

1Q11 Results: Lower MTRs offset weaker trendsMoody's: Caa1; Outlook,NegS&P: B-; Outlook,Neg

Ticker

MAXTEL


Jacob SteinfeldAC

(1-212) 834-4066

[email protected]

J.P. Morgan Securities LLC

See page 5 for analyst certification and important disclosu res.J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm mhave a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making thinvestment decision.

• Maxcom reported its 1Q11 results on Thursday April 28 and hosted a

conference call the following day.

• The payment of lower interconnection fees was the main driver for 1Q11results. The company benefitted from lower MTRs, or interconnection fees,

which resulted in a MXN 52 million cost reduction, leading to a 26%yoy

improvement in EBITDA in MXN terms (+33% in USD). The company noted

in its report that it began to pay lower interconnection fees of MXN 0.3912 per

minute, a reduction of MXN 0.6088 (from MXN 1.00 per minute), in 1Q11 after

filing a dispute with COFETEL on December 22, 2010, and Alestra received a

favorable ruling on March 16 to charge a similar rate. If the company had still

been paying the higher rate, EBITDA would have been lower by 7%yoy and16%qoq, more in line with top-line declines. The company has not made any

reserves/provisions in the event MTRs revert back to higher levels, but it

expects COFETEL to issue a favorable ruling sometime in May.

• The potential annual benefit from lower interconnection fees may exceedMXN 200 million (MXN 52 million annualized), assuming similar usage

amounts and no pass-through of savings onto customers. We would expect run-

rate savings to be less than this amount given declining usage trends and strong

competition, but the benefits may still be significant for Maxcom, particularly as

it aims to become FCF positive in 2011.

• Although EBITDA improved sharply during the period and was up for the

fifth consecutive quarter, the underlying top-line trends remain concerning.

Revenues were down 7.3%yoy and 7.9%qoq in MXN terms on the back of a2.2%yoy increase and 1.3%qoq decline in RGUs and a 5.4%yoy decline in

residential ARPUs. It was the fourth consecutive quarter of lower RGU net adds.

After adding 43k RGUs in 2010, the company lost 7.4k in 1Q11. Of particular

note was the 6.6k reduction in residential RGUs after adding 51.8k RGUs in

2010. The residential segment, which has been the key driver of the company’s

improved performance, offsetting declines in the commercial and public

telephony segments, had sequential revenue declines of 9.9% during the quarter,

the first qoq drop since 4Q09 (still up 10.4%yoy). The company did continue to

add residential broadband RGUs, however, mitigating losses in voice and

mobile. Lastly, the churn rate declined further to 2.9% from 3.1% in 4Q10 but

the bad debt expense increased marginally qoq to MXN 25 million.

• The company's liquidity improved during the quarter to $32.1 million, from$30.4 million, but the cash position was less than expected as a result of a ~$5

million margin call payment made during the quarter (Maxcom has hedged 75%

of its coupons through maturity) as the MXN appreciated 3.3% during the

period. Capex of $5.8 million was in line with expectations as the company

plans to only spend $25 million in 2011, down from $57.4 million in 2010. In

2Q11, Maxcom has to make an $11 million interest payment on the 2014 notes

on June 15.



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02 May 2011Jacob Steinfeld(1-212) 834-4066 [email protected]

• No significant change in 2011 guidance, yet. Although growth rates for RGU net

adds (2.2%) and revenues (-7.3%) were below the company’s 2011 guidance of

10% and 0%, respectively, the company only adjusted down its expected RGU

growth rate to 5-10%. The company did not yet officially increase its EBITDA

guidance, which was up 26%yoy and well ahead of the +2-3% forecast given

during the 4Q10 conference call, but it may once it receives a formal decision oninterconnection rates and provides more clarity on the new products and services it

plans to launch. Management stated that it did not take into consideration the lower

interconnection rates when it made its prior guidance. In terms of capex, the

company had no changes to its plan to spend $25 million and seemed more

confident that it would be able to generate positive FCF.

• During 1Q11, gross and net leverage improved by 0.3x and 0.2x, respectively,dropping to 3.4x and 2.9x. This was primarily driven by the $4.1 million

improvement in LTM EBITDA. If we were to annualize 1Q11 results, LTM

EBITDA would increase to $66.5 million and gross leverage would decline to 3.0x,

while net leverage could fall below 2.5x (assumes the company’s cash position

exceeds $35 million at year-end, only possible in our view if EBITDA exceeds $60

million in 2011).• On April 15, Jacque Gliksberg was approved as the new chairman of the

board, replacing Eduardo Vazquez, who will remain on the board. While this was

yet another management change, we view this as positive as Mr. Gliksberg

represents the interest of Nexus Partners (Bank of America), which should be more

driven by financial considerations. As previously mentioned, Salvador Alvarez

replaced William Nazaret as CEO on February 23, and Miguel Cabredo took over

as CFO after Jose Antonio Solbes resigned on September 30, 2010.

• We move the MAXTEL 11% 2014 senior secured notes from marketweight to

overweight as we think the potential returns (21%ytw at mid-market price of 76) are too high to ignore despite trading up 2-3 points since earnings. Although we do not expect significant price appreciation until there is a final

decision regarding the company's MTRs (we assign a high probability of a ruling inMaxcom’s favor, similarly to other fixed line telcos) and it can demonstrate a

reversal in top-line and cash flow trends, we do foresee prices moving toward a

price of 80 by the end of June, offering total returns of 7-8% over the next two

months. We expect it to be able to service its debt for the foreseeable future, given

no maturities until 2014 and an adequate cash balance, and do not foresee an

imminent event for the company. Please see our report dated January 19, titled

( Maxcom Telecomunicaciones SA: Answer this call while the phone is still ringing)

for more a more detailed analysis around various potential restructuring and upside

scenarios.

https://mm.jpmorgan.com/PubServlet?action=open&doc=GPS-532969-0.pdf





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Financial Summary

Table 1: Financial Summary

US$ in millions

Three Months Ended Twelve Months EndedUS$ mil lio n 1Q10 2Q10 1Q10 4Q10 1Q11 QoQ YoY 2009 2010 1Q11 LTM YoYINCOME STATEMENTNet Revenues 49.8 52.1 49.8 51.6 48.9 (5.4%) (1.9%) 190.0 204.1 203.2 (0.5%)Residential 18.0 20.4 18.0 22.8 21.1 (7.5%) 16.9% 68.8 82.5 85.5 3.7%Commercial 14.2 14.3 14.2 12.8 12.8 0.1% (9.9%) 58.5 54.9 53.5 (2.6%)Public Telephony 7.7 7.6 7.7 7.3 5.7 (22.1%) (25.4%) 34.3 29.9 28.0 (6.5%)Wholesale 9.7 9.5 9.7 8.4 9.0 6.7% (7.8%) 27.4 35.9 35.1 (2.1%)Other 0.2 0.3 0.2 0.4 0.3 (3.7%) 61.8% 1.0 1.0 1.1 13.5%Gross margin 27.4 28.9 27.4 29.6 31.4 5.9% 14.5% 106.2 115.3 119.3 3.4%% margin 55.0% 55.4% 55.0% 57.4% 64.2% 55.9% 56.5% 58.7%EBITDA 12.5 12.9 12.5 14.1 16.6 18.2% 33.4% 46.9 52.7 56.8 7.9%EBITDA Margin 25.0% 24.7% 25.0% 27.2% 34.0% 24.7% 25.8% 28.0%

Adj us ted EB ITDA 12.5 13.0 12.5 14.3 16.6 16.5% 33.0% 47.0 53.2 57.3 7.8%EBITDA Margin 25.1% 25.0% 25.1% 27.6% 34.0% 24.8% 26.0% 28.2%Interest Expense (6.7) (6.2) (6.7) (6.1) (6.0) (22.4) (24.9) (24.2)LTM Interest Expense (23.6) (24.4) (23.6) (24.9) (24.2) (22.4) (24.9) (24.2)Net Income (4.4) (5.9) (4.4) (76.6) (3.2) (22.2) (93.2) (92.0)

CASH FLOW HIGHLIGHTSEBITDA 12.5 12.9 12.5 14.1 16.6 18.2% 33.4% 46.9 52.7 56.8 7.9%

memo item: LTM EBITDA 48.9 49.7 48.9 52.7 56.8 7.9% 16.2%CAPEX 12.1 15.7 12.1 18.1 5.8 (67.9%) (51.9%) 62.3 57.4 51.1 (10.9%)Ebitda-Capex 0.4 (2.8) 0.4 (4.0) 10.8 (15.4) (4.8) 5.7

BALANCE SHEETCash and cash equivalents 68.0 52.4 68.0 30.4 32.1 5.6% (52.8%) 75.4 30.4 32.1 5.6%Total Debt 208.5 199.0 208.5 201.8 208.6 3.4% 0.1% 200.5 201.8 208.6 3.4%Interest Payable 6.9 0.9 6.9 1.0 6.8 (0.3%) 1.0 1.0 6.8Short-term debt 0.0 0.1 0.0 0.1 0.2 0.0 0.1 0.2Long-term debt 201.6 198.0 201.6 200.7 201.6 0.4% (0.0%) 199.5 200.7 201.6 0.4%Net Debt 140.4 146.6 140.4 171.4 176.5 3.0% 25.7% 125.1 171.4 176.5 3.0%

OPERATING STATISTICSRGUs (Subscribers)Residential 388,280 410,110 388,280 417,756 411,174 (1.6%) 5.9% 366,001 417,756 411,174 (1.6%)Commercial 79,678 78,385 79,678 68,600 67,682 (1.3%) (15.1%) 81,081 68,600 67,682 (1.3%)Public telephony 41,191 41,334 41,191 41,124 41,080 (0.1%) (0.3%) 41,393 41,124 41,080 (0.1%)Wholesale 28,125 27,165 28,125 29,084 29,299 0.7% 4.2% 25,110 29,084 29,299 0.7%Total 537,274 556,994 537,274 556,564 549,235 (1.3%) 2.2% 513,585 556,564 549,235 (1.3%)Net Adds 23,689 19,720 23,689 (2,370) (7,329) 39,051 42,979 (7,329)Customers 235,482 244,761 235,482 247,616 243,340 (1.7%) 3.3% 227,467 247,616 243,340 (1.7%)Net Adds 8,015 9,279 8,015 1,202 (4,276) 2,855 20,149 (4,276)

CREDIT STATISTICSLTM EBITDA/LTM Int Exp 2.07x 2.04x 2.07x 2.12x 2.35x 2.10x 2.12x 2.35x

Debt/LTM EBITDA 4.26x 4.00x 4.26x 3.83x 3.67x 4.27x 3.83x 3.67xNet Debt/LTM EBITDA 2.87x 2.95x 2.87x 3.26x 3.11x 2.67x 3.26x 3.11xDebt/L2QA EBITDA 4.24x 3.93x 4.24x 3.70x 3.40x 3.70x 3.40xNet Debt/L2QA EBITDA 2.86x 2.89x 2.86x 3.14x 2.88x 3.14x 2.88x

Source: Company reports and J.P. Morgan estimates.



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Table 2: Financial Summary

MXN in millions

Three Months Ended Twelve Months Ended(MXN mil lio n) 1Q10 2Q10 3Q10 4Q10 1Q11 QoQ YoY 2009 2010 1Q11 LTM YoY

INCOME STATEMENTNet Revenues 635.7 655.2 647.0 639.5 589.2 (7.9%) (7.3%) 2,562.6 2,577.4 2,530.8 (1.8%)Residential 230.0 256.0 273.0 282.0 254.0 (9.9%) 10.4% 929.0 1,041.0 1,065.0 2.3%Commercial 181.0 180.0 174.0 158.0 154.0 (2.5%) (14.9%) 788.0 693.0 666.0 (3.9%)Public Telephony 98.0 96.0 93.0 91.0 69.0 (24.2%) (29.6%) 462.0 378.0 349.0 (7.7%)Wholesale 124.0 120.0 105.0 104.0 108.0 3.8% (12.9%) 370.0 453.0 437.0 (3.5%)Other 2.7 3.2 2.0 4.5 4.2 (6.3%) 52.8% 13.6 12.4 13.8 11.7%Gross income 349.9 363.3 375.6 367.1 378.3 3.1% 8.1% 1,431.2 1,455.9 1,484.2 1.9%Gross Margin 55.0% 55.4% 58.0% 57.4% 64.2% 55.9% 56.5% 58.6%EBITDA 159.0 162.0 169.5 174.1 200.4 15.1% 26.0% 632.2 664.7 706.1 6.2%EBITDA Margin 25.0% 24.7% 26.2% 27.2% 34.0% 24.7% 25.8% 27.9%

Adjusted EBITDA 159.6 163.6 171.2 176.7 200.4 13.4% 25.6% 633.9 671.1 711.9 6.1%EBITDA Margin 25.1% 25.0% 26.5% 27.6% 34.0% 24.7% 26.0% 28.1%Interest Expense (86.1) (77.4) (75.7) (75.3) (72.8) (3.3%) (15.4%) (302.0) (314.4) (301.1) (4.2%)

CASH FLOW HIGHLIGHTSEBITDA 159.0 162.0 169.5 174.1 200.4 15.1% 26.0% 632.2 664.7 706.1 6.2%

memo item: LTM EBITDA 640.9 641.6 648.6 664.7 706.1 6.2% 10.2%CAPEX 154.3 197.0 148.0 224.1 70.0 (68.7%) (54.6%) 848.1 723.4 639.1 (11.6%)Ebitda-Capex 4.8 (35.0) 21.5 (50.0) 130.4 (215.9) (58.7) 66.9

BALANCE SHEETCash and Marketable Securities 841.4 678.8 619.3 375.2 382.3 1.9% (54.6%) 987.3 375.2 382.3 1.9%Total Debt 2,577.7 2,575.6 2,588.5 2,490.7 2,483.7 (0.3%) (3.6%) 2,625.2 2,490.7 2,483.7 (0.3%)Interest Payable 84.9 12.2 84.3 12.7 81.5 541.6% (4.0%) 13.4 12.7 81.5Short-term debt 0.0 0.7 0.9 1.7 2.5 0.0 1.7 2.5Long-term debt 2,492.8 2,562.7 2,503.2 2,476.3 2,399.6 (3.1%) (3.7%) 2,611.7 2,476.3 2,399.6 (3.1%)Net Debt 1,736.3 1,896.8 1,969.2 2,115.5 2,101.4 (0.7%) 21.0% 1,637.8 2,115.5 2,101.4 (0.7%)

OPERATING STATISTICSRGUs (Subscribers)Residential 388,280 410,110 417,265 417,756 411,174 (1.6%) 5.9% 366,001 417,756 411,174 (1.6%)Commercial 79,678 78,385 73,467 68,600 67,682 (1.3%) (15.1%) 81,081 68,600 67,682 (1.3%)

Public telephony 41,191 41,334 41,217 41,124 41,080 (0.1%) (0.3%) 41,393 41,124 41,080 (0.1%)Wholesale 28,125 27,165 26,985 29,084 29,299 0.7% 4.2% 25,110 29,084 29,299 0.7%Total 537,274 556,994 558,934 556,564 549,235 (1.3%) 2.2% 513,585 556,564 549,235 (1.3%)Net additions 23,689 19,720 1,940 (2,370) (7,329) 39,051 42,979 11,961

CREDIT STATISTICSLTM EBITDA/LTM Interest Exp 2.07x 2.04x 2.08x 2.11x 2.34x 2.09x 2.11x 2.34xDebt/LTM EBITDA 4.02x 4.01x 3.99x 3.75x 3.52x 4.15x 3.75x 3.52xNet Debt/LTM EBITDA 2.71x 2.96x 3.04x 3.18x 2.98x 2.59x 3.18x 2.98xDebt/L2QA EBITDA 4.06x 4.01x 3.90x 3.62x 3.32xNet Debt/L2QA EBITDA 2.74x 2.95x 2.97x 3.08x 2.81x

Source: Company reports and J.P. Morgan estimates.



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General: Additional information is available upon request. Information has been obtained from sources believed to be reliable but JPMorganChase & Co. or its affiliates and/or subsidiaries (collectively J.P. Morgan) do not warrant its completeness or accuracy except with respect to anydisclosures relative to JPMS and/or its affiliates and the analyst’s involvement with the issuer that is the subject of the research. All pricing is asof the close of market for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of thismaterial and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or



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“Other Disclosures” last revised January 8, 2011.

Copyright 2011 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold orredistributed without the written consent of J.P. Morgan.#$J&098$#*P

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