Brazil’s Winning “Triple Play”

04/01/2008 12:00 am EST


John Christy

Founding Editor, Forbes International Investment Report

John H. Christy III, editor of Forbes International Investment Report, says Brazil’s leading cable-television provider is just scratching the surface of a booming consumer market.

While the talking heads debate “decoupling” and the precise impact of the credit crunch on the global economy, hundreds of millions of consumers in Latin America, Eastern Europe, and Asia are now able to afford products and services that were out of reach just a decade ago.

Demand for cell phones, personal computers, cars, cable television, financial services, better-quality food, and even luxury goods is likely to remain strong for decades to come in many of these markets as incomes expand. This is not a fad—it is an inevitable consequence of economic development.

Consider Brazil’s Net Servicos de Comunicacao (NASDAQ: NETC). NETC is the largest cable television company in Latin America, reaching 2.5 million subscribers. It also has a broadband internet business, with 1.4 million customers. NETC’s network passes a total of about nine million homes in nearly 80 cities throughout the country. The company has a 46% market share in cable television and 15% share in broadband.

But NETC has barely even scratched the surface. Less than 10% of Brazil’s 190 million people have access to cable television. So-called “triple play” bundles of Internet, telephone, and cable television services are just now becoming affordable to many Brazilian consumers, and NETC is a pioneer in this area.

Last month, NETC reported very strong fourth-quarter and full-year 2007 results. Full-year revenue rose 29% to $1.5 billion on strong subscriber growth. NETC’s cable television subscriber base grew 16% last year, and its broadband subscriber base surged 65%. EBITDA (earnings before interest, taxes, depreciation, and amortization) grew 26% to $410 million.

There is also a big opportunity for NETC to improve its return on capital. Last year’s return-on-invested capital was just under 8%, but Credit Suisse expects that to rise well into the double digits in 2008 and 2009. NETC will continue to benefit as the penetration rate of cable television and broadband services rises.

And there’s also room to get existing customers to spend more [as] many of the services that have driven revenue growth for developed-market cable companies are just getting started in Brazil. For example, High Definition (HD) services are still in their infancy. NETC offers HD capability, but this has really only been an option for a few months. As demand for these services catches on, NETC will be a prime beneficiary.

The big risk here is a slowdown in the Brazilian economy. Earlier in the decade, NETC’s growth engine stalled when the global economy tanked following the burst of the Internet bubble. But Brazil is in a lot better macroeconomic shape than it was back then, and with economic growth running at 4.5%, consumer spending is likely to remain fairly robust.

[Meanwhile], the ADRs have pulled back significantly from their 2007 highs of more than $18. At a recent $10.50, NETC is about where it was trading back in the fall of 2006, despite considerably stronger fundamentals.

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