Spotlight: The discouraging outlook for Mexico's Axtel

The near-term prospects for Axtel, the telecommunications company spun off from Mexico's Alfa group, do not look encouraging.

The impact of the decline in the firm's government contracts, generalized macroeconomic weakness in the country and lower-than-expected growth in the company's infrastructure unit have undermined the company's future.

Fitch Ratings recently made a downward revision to Axtel's rating outlook to negative from stable and downgraded its long-term foreign and local currency international ratings to 'BB-' from 'BB'. It also lowered the rating for Axtel's long-term national rating to 'A-' from 'A' and its senior unsecured dollar notes due 2024 to 'BB-'.

“The rating downgrade and negative outlook reflect the company's continued weakness in the government services business and adversities in the infrastructure business, factors that have had a significant impact on Ebitda in recent quarters, leading to a deterioration in the credit profile of the company,” Fitch said in a release.

The weak economic scenario also "clouds the company's ability to regain a more solid credit profile during the rating horizon," it added.

The Fitch downgrade comes on the heels of one made by Moody's in November, cutting its rating from 'B1' to 'B2' on Axtel's corporate family and regular senior unsecured bonds.

Both rating agencies understand that although Axtel has managed to improve its financial situation, the macroeconomic context and the drop in sales to the federal government, in addition to the loss of revenue from infrastructure client Altán, continue to complicate the company's prospects.

“While the company has been able to gradually reduce its net debt, net leverage has increased in recent quarters, reflecting deteriorating operating performance,” Fitch said in its analysis.

The company expects its net debt to Ebitda ratio to reach 3.9 times in 2022 before modestly improving to 3.7 times in 2023.

AXTEL'S BUSINESS

The firm's latest results report published in October announced revenues of 2.73bn pesos (US$141mn) in 3Q22. The infrastructure unit was responsible for nearly half of these revenues, contributing 1.2bn pesos.

"Revenues grew 7% and Ebitda 12% quarter-on-quarter due to positive results in both the infrastructure and services units," Grupo Alfa CFO Eduardo Escalante said in October.

However, according to Fitch, the infrastructure unit's revenues have fallen 13% year-on-year in Mexican pesos due to the expiration of dark fiber contracts, along with the loss of revenues from Altán Redes.

In addition, “5G fiber to the tower and fiber to datacenter growth opportunities have materialized slower than expected,” it added.

The firm's ICT unit for corporate sector business reported revenues of 2.15bn pesos, with 32% sequential growth in contracts with the government, which totaled 248mn pesos. The business unit's revenues grew 12%.

“While voice services continue to decline, cloud and cybersecurity solutions have risen rapidly as Axtel is able to meet the growing secular demand for these solutions with its wide range of services, in the midst of a competitive industry,” Fitch stated.

During the third quarter of 2022, Axtel's gross profit was 3% higher year-on-year, according to its earnings release.

“The relative stability of business-to-business service and the flexibility of capital investments have allowed the company to generate positive free cash flow,” Fitch explained. The company expects Axtel's cash flow to surpass 560mn Mexican pesos in 2022, but then to turn negative from neutral as modest Ebitda growth will likely be offset by higher capex needs and higher interest on cash paid after the firm's refinancing.

Fitch expects Axtel's revenues to reach 10.8bn Mexican pesos in 2022, growing 2-3% going forward. Capital investments as a proportion of revenues will be between 13% and 14%.

Axtel ended September with net debt of US$566mn, down 8% year-on-year.