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NII Holdings Again in Neutral Zone

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We upgrade our recommendation on NII Holdings Inc. to Neutral based on its low-level of current valuation and two recently taken strategic decisions.

Why the Upgrade?

NII Holdings has decided to sell its operations in Peru to Chile’s Entel for around $400 million. The company will use the sale proceeds to focus on two of its largest markets, Mexico and Brazil. The deal is expected to close in the second half of 2013, subject to regulatory approvals. In 2012, Nextel Peru contributed only 5.6% to the company’s total revenue. However, Nextel Peru's 2012 revenue suffered a 2.3% decline as cut-throat competition from larger operators like America Movil SAB (AMX - Free Report) and Telefonica SA (TEF - Free Report) affected its average revenue per user.

Recently, NII Holdings combined with Motorola Mobility, a division of Google Inc. , to launch Atrix HD smartphone in Mexico. Atrix HD is preloaded with NII Holdings’ push-to-talk (PTT) solutions, called PRIP. With Atrix HD, Nextel Mexico customers will be able to enjoy the PTT service with a high-end smartphone. Additionally, the software of PRIP can be used in other devices running on the Android platform. 

Risk/Reward Almost Balanced

Meanwhile, NII Holdings continues to perform inadequately. Due to its somber results, management slashed its 2013 financial outlook. This was primarily due to the volatile economic condition coupled with huge depreciation of several Latin American currencies with respect to the U.S. dollar. A stiff competitive scenario in the Latin American markets is another reason behind the lowering of the outlook. In our view, intensifying competition and increased promotional expenses are major near-term concerns. We do not expect the company to achieve profitability either in 2013 or in 2014.

Nevertheless, the ongoing restructuring of the business model may help the company to regain its lost ground. NII Holdings has already started offering 3G wireless service in Chile and Mexico and will deploy it on a wider basis in Brazil by mid-2013. Healthy annual subscriber growth (11,361,500 total digital subscribers at the end of 2012, up 6.1% year over year) demonstrates its service capability and prospects over the long haul. 

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