Wall Street Bullish on John Malone's Latin American Tracking Stock

John Malone in 2012 - H 2015
Associated Press

The tracker for the Chilean and Puerto Rican assets of international cable operator Liberty Global is set to start trading on Thursday.

John Malone's international cable operator Liberty Global will later on Wednesday distribute shares of a tracking stock for its Liberty Latin America and the Caribbean ("Lilac") unit, which will formally start trading on Thursday.

Ahead of the launch of the tracking stock, which will allow investors to focus on the smaller, but emerging Latin American business of the company, Wall Street analysts are bullish on its outlook.

ISI Media analyst David Joyce recently initiated coverage of the tracking stock with a "buy" rating and $55 target price, calling it "a leveraged equity consolidation play on Latin America."

Lilac includes 100 percent of the Chilean operations VTR GlobalCom and VTR Wireless, plus LGI Broadband Operations, which holds Liberty Global's 60 percent stake in Liberty Cablevision of Puerto Rico.

"Strong organic growth from product penetration upside, new products, new build opportunities and price increases" are among the positive factors that Joyce highlighted. "We expect Lilac can generate pro forma revenue of $1.27 billion and operating cash flow of $509 million in 2015," he said. "Lilac's networks are almost all digital, which support superior speeds and channel offerings versus competitors. Peers are incumbent telcos reliant on copper DSL technologies, satellite companies with no natural bundle and mobile that cannot match cable's throughput and speeds."

Joyce also highlighted regional consolidation opportunities. "However, given the tracking stock structure, we do not envision M&A in the near term," he said.

Wunderlich Securities analyst Matthew Harrigan said the tracking stock "should afford an excellent investment opportunity." He expects it could be worth near $58 in 2016.

He also called the tracker an "entry ticket for Latin American and Caribbean M&A activity."

Macquarie analyst Amy Yong recently said in a report that the tracking stock was an "emerging LatAm star" and said there were "lots of strategic options ahead. Among them are "growth through acquisitions and other partnerships," a combination with Malone’s roughly 13 percent stake in Cable & Wireless, which operates in the Caribbean, Central America and West Andes and a possible sale to a larger player, she said.

Her telecom analyst colleague "believes America Movil could buy assets of Lilac to increase scale in markets outside of Mexico and Brazil," Yong said.

Twitter: @georgszalai