Boots on the Ground in Argentina

Key Takeaways

Macro

This research trip provided further evidence of our thesis for economic recovery in Argentina. Throughout our meetings, we noticed two themes unfolding: (i) improving underlying business and economic activity, as evidenced by economic data and what companies are seeing day-to-day and reporting in their results; and (ii) political uncertainty due to entrenched political opposition from long-standing incumbents.

With respect to economic activity, our discussions with the Argentine Finance Minister as well as several companies across different industries during our trip left us believing that the damage from the country’s recent recession was severe, with many lessons learned (resulting in cost cutting and recapitalizations). Importantly, signs of a domestically  driven recovery are finally starting to take a firmer shape.

On the political front - we came away incrementally bullish, though cognizant of potential challenges on the near-term horizon (lifting capital controls / new IMF deal / latest headlines surrounding cryptocurrencies). Over the long term, we continue to believe that investors will be proven to have been too fearful relative to where we were in the economic cycle of the country. Milei’s success in enacting material change has proved skeptics wrong, and in turn, garnered high public approval ratings necessary to carry out additional reforms throughout the remainder of his term.

Sentiment wise, locals continue to be skeptical due to past economic crises, broad-based government corruption, and “flash in a pan” outcomes without lasting economic reform. However, these locals admit that their views may be myopic, emotional, and overly harsh, and that foreigners are often better at being objective about economic and political turning points.

The potential for a new IMF deal represents the most tangible evidence of what we believe will be a significant catalyst (expected in April 2025). Therefore, we believe the market is underestimating the positive implications of a new deal for both the country’s fiscal situation as well as specific companies with dry powder to capitalize on it.

Micro

VIST: Vista Energy has successfully transitioned to shale oil production which has helped drive robust revenue and earnings growth in recent years. The company is led by arguably the best Exploration and Production (E&P) management team in all of Latin America with a proven track record of stellar execution and delivering on aggressive operational targets since being formed in 2017.  

PAM: Pampa Energia is undergoing a significant transformation from an integrated utility-focused company to a major oil and gas producer. Its shale oil business in Vaca Muerta will be key driver of future growth, which PAM is putting meaningful investment capital behind.  Near term, regulatory changes in the power sector could drive improvements in the overall outlook, though long-term, Pampa’s management team remains laser focused on balancing growth and profitability, aligning its interests with investors.

YPF: YPF is the largest energy company in Argentina equipped with new management team and ambitious business strategy centered on maximizing the value of its shale assets and developing LNG export capabilities. The company’s 4x4 strategy provides a clear roadmap for growth, with specific targets and a commitment to efficiency. We believe YPF remains well positioned to drive future growth as the company streamlines operations, divests non-core assets, and reclaims its role as industry leader within Argentina. That said, future success remains contingent upon their ability to execute their strategy while maintaining strong government dynamics.

SUPV: Grupo Supervielle (SUPV) has weathered the economic storm and is implementing a complete digital transformation of the bank to drive the next leg of growth. New leadership has been critical in helping SUPV execute this strategy which we believe will help drive sustainable revenue/earnings growth thanks to increased product penetration, cross selling opportunities, and expanded joint ventures.

TEO: TEO is one of the leading telecom companies in Argentina with a large customer base, extensive infrastructure, and a diversified revenue stream. Despite macroeconomic challenges and currency volatility, the company seems well-managed, focused on cost efficiency, and poised to capitalize on potential improvements in the Argentine economy. Timing will be key here given the potential for high growth sectors to  benefit first in the early stages of economic recovery, though should ultimately flow through to more mature markets such as telecom.

BMA: Banco Macro remains among the best financial institutions in Argentina and is poised for significant future growth. The bank is equipped with a well-capitalized balance sheet, deep branch network, and offensive growth strategy which should drive loan growth of 40-50% for the next several years. Macro risks remain; however, management is optimistic that government policies will be conducive to growth with Argentine financials being among the biggest beneficiaries. 

To Sum Up

I have been to Argentina numerous times in my investing career, but this visit was particularly special. Importantly, we left with stronger conviction that Argentina remains one of the most compelling investment themes we have seen across our portfolios since we founded the firm. 

The reason is simple: we believe the country remains in the early innings of a massive recovery in economic growth driven by falling inflation and an expansion in credit creation. Investors are not yet fully appreciating the magnitude and duration of this recovery.

In the near term, we could see bouts of volatility on the back of increased political uncertainty. However, we expect any such volatility to be short-lived, outweighed by strong momentum from economic growth and policy reforms which should provide support for Argentine equities.

Over the long term, we believe Argentina is a highly asymmetric investment opportunity poised for potentially material gains over the next 2-3 years as the country transitions from normalization to prosperity.

-- John Bottcher 

Argentine Equities: Detailed Holdings Commentary

Vista Energy | VIST

Vista Energy is one of the leading energy players in Argentina with prime exposure to the country’s crown jewel, Vaca Muerta - the largest shale oil and shale gas play under development outside of the US. Led by the former CEO of YPF, Vista was formed in 2017 as a platform to capitalize on the Latin America upstream oil and gas segment with the majority of the company’s assets in Argentina.

Company Overview

• Vista was founded in 2017 as an energy exploration & production (E&P) company focused on conventional production. It began expanding operations shortly after launch with several acquisitions in Argentina under the direction of the former YPF CEO who had been responsible for more than 30% of the wells drilled in the Vaca Muerta.
• Vista recently made a strategic decision to transition to shale oil production in the Vaca Muerta formation, selling off all conventional assets which has provided a healthy tailwind to profit margins given the higher cost profile of conventional assets.
• Initially, the company was operating with 24k barrels of conventional oil production, of which zero came from Vaca Muerta.
• Today, 95% of their production comes from Vaca Muerta which has been key driver of growth given the favorable unit economics (lower cost profile) of these assets.
• Production has grown materially from 24k barrels/day to 72k barrels/day in Q3 2024, exiting the year at 85k barrels/day.
  

Fundamentals

• Vista’s favorable economics and industry-leading cost profile have been key drivers of profitability with more than +2500bps of margin expansion realized over the past 5 years. As of Q3 2024, lifting costs were $4.5/barrel, representing more than 60% improvement since 2018.
• EBITDA margins remain attractive at ~70%. Over the last 12 months, Vista generated $1.1B in EBITDA and expects to end FY24 near upper end of their guidance ($1B to 1.3B). Looking forward, management expects strong growth to continue with EBITDA growth of 35-40% in 2025, reaching ~$1.5B to $1.65B.
• They anticipate free cash flow (FCF) to be negative in 2025 due to increased capital investment in the Vaca Muerta Sur project. However, the company is aiming to be FCF positive from 2026 onward. The company will use excess FCF to either buy back shares, pay dividends, reduce debt, or pursue opportunistic acquisitions.
• Current corporate debt has low interest rates (average of 3.5%) due to a previous Argentine government policy which enabled company to issue local debt maturing in the 2026-2028 range at a 0% coupon.

Export Focus and Pricing

• Argentina transitioned from an oil importer to an exporter in 2021 which was key shift that benefited Vista.
• Currently, 50-60% of Vista's production is exported, and 70-75% of their production is sold at export parity pricing while the remaining is sold locally.
• The company’s local sales volume is roughly 20k barrels per day which remains relatively constant. Vista’s ability to develop pipelines and shift higher exports into the global market has been a key driver behind the company’s robust growth profile given that Vista can realize higher spreads while also adding greater stability.

Growth Strategy

• Vista's growth profile is underpinned by its ability to continue ramping production growth in Vaca Muerta, with the company targeting similar production growth as they’ve done over the past 5 years (i.e. production increased 3x since 2018)
• As of Q3-24, Vista’s production levels stood at 86kbpd  with the company announcing guidance of reaching production  of 95-100k bpd by year end 2025.
• Additionally, Vista released longer-term targets of generating 150kbpd in production by 2030 solely utilizing its current asset base thus assuming zero new M&A activity.

Management Team

• The company has a flat organizational structure with five levels of management. Everyone is P&L focused and accountable, with rapid decision-making in Argentina.
• A significant portion of the workforce (35%) is compensated with company shares, which helps align incentives and foster sense of ownership.

Capital Allocation

• Management is committed to investing in projects with high rates of return as evidenced by the company realizing 50-70% IRRs on new wells in their core acreage. Net IRRs, which include completed well costs and a new facility, will generally be in the 27-28% range.
• Management’s capital allocation priorities were consistent with prior messaging, with management noting that the company remains opportunistic with regards to M&A provided that the returns are compelling and accretive long term.
• Notably, management ended the meeting by emphasizing that Vista remains laser focused on reaching its aggressive 2030 production targets as well as achieving its goal of generating meaningful returns for investors. Further, he noted that probabilities are high regarding the company implementing a lucrative dividend policy once the Argentine government lifts capital controls.

YPF SA | YPF

YPF is the largest company in Argentina and the leading player in the Argentine energy industry operating in three business segments: Exploration & Production, Refining & Marketing, and Chemicals. Founded in 1922 as a state-owned enterprise, YPF was privatized in 1993 before being purchased from Repsol and becoming renationalized again in 2012.

Key Company Updates 

• New management team - YPF has a fairly new, value-oriented management team who joined in late 2023. CEO Horacio Marin remains laser focused on driving growth and maintaining YPF’s industry-leading production standards.
• New market pricing - Previous price controls were eliminated and now prices at the pump are tied to international prices using a 3-month average formula that accounts for fluctuations (which differs significantly from past practices).
• Focus on value creation - Marin emphasized that his mandate is to drive value creation via increased production and improved cost discipline across all business segments. To do this, Marin introduced his ambitious “4x4” growth strategy.

Management’s "4x4" plan has four pillars of growth:

• Increased Shale Oil Production in Vaca Muerta
• Asset Optimization and Divestments
• Improved Operational Efficiency
• Liquefied Natural Gas (LNG) Project
  
  

  1. Increased Shale Oil Production in Vaca Muerta

  • Management is prioritizing the development of the Vaca Muerta shale formation which is their most profitable asset.
  • YPF has significantly increased its oil production targets in Vaca Muerta as evidenced by the company ramping from 97k barrels/day in 2023 to now over 120k as of November 2024.
  • Looking forward, the company has set aggressive targets with 160k barrels/day in 2025, 200k in 2026 and over 250k by 2027.
  • Lifting costs in Vaca Muerta are approximately $5/barrel, compared to an average of $15/barrel in conventional fields (and up to $25+/barrel in some older, less productive fields), demonstrating cost efficiencies relative to other formations.

  2. Increased Shale Oil Production in Vaca Muerta

  • YPF is selling 13 clusters of mature, less profitable conventional fields (50 blocks) which have lifting costs over $25/barrel. This divestment should have a positive impact on YPF’s future margin profile as it shifts a greater proportion of its production to shale.
  • The company is aiming for a production mix of 80% unconventional (shale) and 20% conventional by the end of 2024 (vs. its current mix of 55% and 45%, respectively).
  • YPF also has other subsidiaries on the chopping block, including small stakes in subsidiaries in Brazil and Chile. Management noted that these potential sales are opportunistic in nature.

  3. Improved Operational Efficiency

  • YPF’s key priorities remain centered on ramping production, streamlining operations, and improving completion speeds.
  • Thus far, the company has strong traction on these priorities, already surpassing targets set at the beginning of the year with impressive growth as evidenced by its revenue/EBITDA growing at 20%/30% CAGRs, respectively, over the past 4 years.

  4. Liquefied Natural Gas (LNG) Project

  • YPF partnered with Shell to develop an LNG plant after replacing its prior partnership with Petrobras (PBR). YPF views this project as highly strategic, as the project provides the ability to monetize gas reserves despite limited domestic demand.
  • LNG project is aimed at export markets in Europe and Asia.
  • Management is seeking 20-year contracts to help secure project financing. The company noted that structuring contracts for long-term exports is essential to managing risk and attracting investment.

  Fundamentals

  • YPF had a strong year in 2024 with company generating $18B in revenue and $5B in EBITDA. Management expects this momentum to continue in 2025 with guidance of ~$6B in EBITDA (+20% YoY).
  • Management expects to be free cash flow (FCF) neutral in 2025 and FCF positive in 2026.
  • YPF currently reinvests all excess FCF into growth projects, particularly in Vaca Muerta. As of now, there are no near-term plans to pay a dividend, though this is largely constrained by foreign exchange controls.
  • The new projects in oil and LNG will add significant incremental revenue with estimates of $15B on the oil side and $50B from LNG by 2030.
  • Debt levels are in line with peers at 1.5x net debt / EBITDA while annual capex spend is roughly $5B.
  • YPF boasts a clean balance sheet with no large debt payments coming due until 2027 ($650M). Looking forward, the company doesn’t intend to issue any more debt in international markets over the next 2-3 years.

  Ownership

  • The Argentine government owns 51% of YPF and has a majority of the directors on the board. The current CEO (Horacio Marin) was appointed by the new government. Despite the governmental ownership, management claims that government interference is minimal.
  • There is a possibility that the new government, which is pro-privatization, may try to sell part of its ownership, but this would require new legislation to execute.
  
  

Grupo Supervielle | SUPV

Grupo Supervielle is the 11th largest bank in Argentina. The company provides financial services through multiple brands, including retail and commercial banking, insurance, asset management and consumer finance to both individuals and corporates. Notably, the company has exclusivity to provide on-site financial services for Walmart Argentina. SUPV operates a network of 130 branches across more than 2M customers. The company is majority owned and controlled by the Supervielle family.

Macroeconomic and Political Landscape

• Milei's administration has proven successful in delivering on his promise with regards to inflation and the fiscal deficit -- a key focal point for locals. Macroeconomic data has meaningfully improved since Milei took office with inflation expected to be 25% in 2025 (down from 118% in 2024). This improvement has enabled local salaries to grow in real terms, which remains a crucial element of the recovery.
• The government delivered a fiscal surplus in 2024, marking the first time this has been achieved in decades. This feat was viewed very favorably among both locals and government leaders, proving to be instrumental to Milei’s success.
• Management has flagged that the ARS exchange rate is important to the locals. Everyone knows the USD/ARS exchange rate and uses this as a barometer the economic health of the country.
• Management doesn’t think the government will remove FX restrictions unless they know there will not be a subsequent increase in inflation. Timing wise, they expect this to take place some time before year-end 2025.
• Despite initial concerns about the negative backlash anticipated from his austerity measures, Milei’s public approval rating has remained strong and steady, proving much better than feared.

Business Strategy

• During Argentina’s recent recession, SUPV (along with most Argentine banks) shifted assets heavily into central bank securities and treasury investments to support growth and protect its assets. Now that the economic recovery has taken hold, management is much more focused on shifting these investments into individual and corporate loans (i.e. loan-to-GDP ratio stands at roughly 7% today, though expected to reach 20%+ over the next 5 years).
• Given this shift, SUPV has closed a large number of physical branches, moving from 183 branches down to 130 as of Q3 2024. For its digital strategy, SUPV’s mobile app is a key input given the digitization of loans/finance transactions in recent years. This dynamic is well illustrated by the fact that digital transactions (as % of total transactions) have increased from 20% before the pandemic, to over 60% as of Q3 2024.
• SUPV hired a new CEO, Gustavo Manriquez, who was formerly the long-time CEO at Banco Macro. Manriquez is very well respected in the industry and had a strong track record of success driving market share as well as navigating the bank through multiple political and economic cycles.
• Manriquez implemented an aggressive new business strategy shortly after taking the helm at SUPV which entailed a complete digital transformation of the bank. This overhaul has been well received by both clients and employees, and as a result, helped spur additional investments to further enhance its mobile app product.
• Notably, as part of the new strategy, SUPV has shifted its strategy away from spending heavy resources to develop solutions in-house and now pivoted towards  establishing several partnerships and joint ventures to help strengthen the company’s digital ecosystem and product set.
• Regarding capital allocation, SUPV is prioritizing organic growth rather than focusing on M&A. However, they intend to remain opportunistic and will engage if/when they see compelling opportunities arise. For the industry itself, SUPV doesn’t see any large-scale M&A deals near term given that the banks that were seeking to sell have already done so in recent years.

Key Challenges

• With regards to the macro landscape, material swings in inflation and FX have introduced a lot of difficulty for investors in understanding the financial health of the bank given the perceived distortions. Management has had meetings in which some investors conceded they have refrained from getting involved due to difficulty in tracking financial adjustments with these inflation and FX dynamics each quarter. That said, inflation has meaningfully improved from 100%+ down to now 25-30% expected in 2025.
• Current FX and capital controls continue to have a negative impact on local businesses and add increased complexity to normal operations. More specifically, these restrictions inhibit companies from conducting FX transactions in order to pay expenses abroad.
• Management noted that the bank’s Return on Equity (ROE) is expected to decline slightly in 2025 as they shift away from investments in government securities and begin driving loan growth to consumers and corporates. They noted that cost discipline remains one of their highest priorities and that they will help the bank balance new growth opportunities with enhanced profitability.
  

Variant Perception

• Management believes that many investors are not realizing the organic growth story within the Argentine banking sector. Argentina’s improving macroeconomic environment should be a key catalyst in supporting robust loan growth and higher consumer confidence levels in coming years.
• Management thinks investors have not fully realized or appreciated the extent of SUPV’s digital transformation and the subsequent impact on the bank’s revenue and earnings power.
• SUPV emphasized that they believe the macroeconomic recovery is significant and sustainable which provides the company with a long runway for growth over the next 3-5 years. As a result, they remain confident that they will execute on their business strategy which should enable them to drive higher cross selling and  product penetration among clients as well as gain market share from competitors.
  

Pampa Energia | PAM 

Founded in 1995, Pampa Energia is the dominant integrated energy company in Argentina with the company serving as the 2nd largest independent power producer. Pampa has a long history as a key beneficiary of large-scale government programs with favorable pricing mechanisms to help reduce the energy deficit in Argentina. The company also owns a significant portion of Argentina’s energy and electricity business with large stakes in transmission, gas transport, distribution, and generation.

Company Overview

• Pampa Energia started as a utility company focused on electricity and has continued to evolve through several acquisitions to become a major power and gas producer in Argentina. Today, the company focuses heavily on developing its shale oil business, thus transitioning to "an E&P company with utility assets."
• The company operates five main segments: Power Generation, Oil & Gas, Power Transmission, Petrochemicals, and Midstream.
• Currently, the power generation sector is characterized by long-term Power Purchase Agreements (PPAs) which provide great stability for businesses. However, the lack of deregulation has negatively impacted industry profitability, thus inhibiting  new investment plans and project developments.
• More specifically, Pampa described the industry as deeply fragmented, essentially “living in two worlds.” PPAs are doing well while the legacy plants are deeply unprofitable and continue to struggle.
• While Milei is aware of these challenges and acknowledged the need for industry reforms, timing remains uncertain and a sector overhang may persist until new regulatory improvements are implemented. 

Business Drivers

• Pampa is investing heavily in the Vaca Muerta with large-scale investments allocated towards developing shale oil projects (primary focus at Rincon de Aranda). Management believes this transition will drive transformational growth for the company, and will remain a key driver of growth for the next several years.
• Regarding Pampa’s shale oil development at Rincón de Aranda, this acreage is located in the core development hub of Vaca Muerta and is in close proximity to Vista’s prime acreage.
• Management noted that these specific wells are ranked in the top quartile of Vaca Muerta in terms of quality and output. As such, Pampa possesses a compelling growth opportunity with the company expected to generate ~$700M in EBITDA by 2027 at an oil price of $60/barrel.
• On production timelines, Pampa is currently producing around 1k barrels per day (bpd) with plans of ending 2024 at 20k bpd. Looking forward, production should be fully ramped at 45k bpd by 2027, deploying three drilling rigs and one fracking crew, with total capex of ~$5B over 15 years.
• Pampa’s return threshold oil price is $45 per barrel, at which it generates a 13% IRR, making it very resilient compared to older shale developments in Argentina.

Gas Monetization and FLNG Project

• Pampa outlined its recent investment in Golar FLNG project (20% stake) with Pan American Energy to monetize gas reserves.
• The project is expected to be operating at full capacity by 2027 and should serve as a compelling solution for gas exports while also allowing Pampa to expand operations in the future. Total capex is expected to be $2.9B over 10 years.
• From the project's total gas requirement of 11.5M/day, Pampa plans to supply 3M/day. Additionally, the FLNG project also allows Pampa to utilize idle capacity and gas swapping techniques in the short term.

Fundamentals

• Management expects the company’s shale oil business will help increase EBITDA by more than 100% over the next 3 years, reaching $1.5B by 2027 (vs. $800M today). Including other assets, Pampa’s combined EBITDA would then be close to $2B.
• Management expects the Vaca Muerta midstream business to generate ~$160M in EBITDA during 2024, benefiting from the recent capacity expansion.

Fundamentals (continued)

• The total capex budget for 2024 is $270M (including $200M in expansion and $70M in maintenance activities).
• Estimated cash-on-cash payback for the shale investment is around 1.5 years due to the high production rate of the wells.
• Due to FX restrictions and capital controls, the company does not expect to resume its dividend in the near term.
• Pampa’s debt profile is comfortable with no large maturities coming due in next few years. Management refinanced a large portion of its debt, extending out to 2028-2029.
• Net leverage is low at 0.5x with management indicating plans for further deleveraging in the near future. 

Banco Macro | BMA

Banco Macro is one of the leading banks in Argentina with the most extensive private-sector branch network in the country. The company has two broad categories of customers: (i) retail customers and (ii) corporate customers, which include small, medium and large companies and also provide services to four provincial governments. As of 2024, BMA has the largest private branch network in Argentina with 515 branches. The company ranks 3rd in terms of total loans and 4th in terms of total deposits among private banks in Argentina.

Company Overview

• Banco Macro is the largest private branch network in Argentina, with 515 branches across the country. It is well known as the "most capitalized bank in Argentina."
• Banco Macro has a history of acquisitions including Bansud (2001), provincial banks (2004/2005), Nuevo Banco Bisel S.A. (2006), Banco Privado de Inversiones (2010), and Itau (2023).
• Historically, loans comprised 55-60% of BMA’s assets, with government securities representing 20-25%.
• In 2023 and early 2024, management shifted its loan mix down to 30% of assets while government securities rose to 50%. This shift was primarily due to limited loan demand as well as banks seeking returns through government securities. Management painted the picture that "the only way for banks to make money during the severe recession was by investing in government securities and central bank notes."

Fundamentals

• Similar to Supervielle, Banco Macro remains focused on prioritizing loan growth alongside the economic recovery.
• They see a healthy amount of loan growth in both Argentine pesos and US dollars, which they expect to continue for the next few years.
• BMA has a strong Tier 1 capital ratio of around 30%, though management emphasized they are arguably overcapitalized and have more capital than needed.
• This was largely driven by the company’s 2017 follow-on offering (intended to acquire Banco Patagonia), a central bank dividend prohibition during the COVID period (2020-2021), and the low risk weighting of their government security investments.
• The central bank approved dividends in 2022, 2023 and 2024 but could see potential for a higher dividend going forward.

Loan Portfolio

• Near term, BMA expects loan growth to be 40-50% YoY in real terms for 2025, with similar growth in 2026.
• On the consumer side, they are seeing strong demand in personal loans and credit card loans. On the commercial side, demand for overdrafts and short-term working capital loans also has improved in recent months.
• Corporate loans have steadily increased in USD due to the perception that the rolling 2% FX peg will hold steady (1% moving forward) and result in lower interest rates in dollars compared to pesos.
• BMA’s US dollar loans are primarily extended to companies with USD-linked revenues (typically oil and gas companies).
• Personal loans are unsecured but typically extended to individuals with payroll accounts at BMA which streamlines the process of automatic installment deductions.
• Non-performing loans (NPLs) remain low at ~1.5%. Historically, NPLs have remained below 2% since 2019 (compared to peak around 3.5% in 2009).
• Management expects NPLs to remain in check for the foreseeable future and does not expect any meaningful deterioration despite loan growth volumes accelerating.

Unit Economics

• Currently, BMA’s margins on ARS loans are much higher than USD loans due to USD interest rates declining as a result of increased competition.
• Personal loans in pesos have high interest rates of "around 70% plus fees."
• Management expects its blended NIM to be between 15-20% near/medium term.
• Leverage remains low at 3x (Leverage = Total Gross Assets / Shareholder Equity), though over the medium term, BMA could see leverage increase to roughly 6-7x, possibly 8x.
• For 2024, BMA’s ROE guidance is around 10% in real terms with 2025 ROE expected to be between 12-15%.
• While ROE seems low optically, this is due to the bank’s excess capital. Management does not expect BMA to remain overcapitalized for long; they are actively discussing the potential for M&A and/or a compelling dividend policy for shareholders.

Key Challenges

• The most crucial government policy is to keep inflation under control. If not managed properly, inflation levels could accelerate meaningfully higher and become a material risk for BMA.
• High inflation levels negatively impact bank profitability due to the net monetary position losses on the P&L.
• BMA wants the government to remove FX controls which they believe will have a positive impact on the economy. That said, they recognize that timing and execution are critical, and that the government should proceed carefully to avoid a spike in inflation rates.
• Management noted that the Argentine government will need to negotiate a new deal with the IMF in order to build the necessary cash reserves prior to capital controls being lifted.

Telecome Argentina | TEO

Telecom Argentina is one of the leading telecom companies in Argentina. Its main business is the provision of wireless telephone services through its subsidiary Telecom Personal. It also offers cell phone service to a smaller customer base in neighboring Paraguay through a controlling stake in Núcleo. The company has about 22.5 million total wireless customers with 4 million fixed line telephone service subscribers in northern and southern Argentina.

-- 

Company Overview

• TEO is largest telecommunications company in Argentina with more than 23 million customers across multiple countries.
• TEO infrastructure consists of 8,400 sites and a fixed broadband network spanning over 94,000 meters which passes through more than 65% of homes in Argentina.
• TEO holds leading positions in mobile, broadband, and TV markets, and was the first operator to build and offer a 5G network in Argentina.
• Outside of Argentina, the company also has operations in Paraguay and Uruguay.
• In Paraguay, they offer comprehensive telecom services and are the second most important player in both mobile and broadband.
• In Uruguay, they are currently present in the TV market and are beginning to operate in broadband. Operations are relatively small, though the company is the second biggest player in pay TV. Management sees a large opportunity for future growth in Paraguay by adding broadband to its offering.
  

Fundamentals

• Management believes its strong positioning enables the company to utilize effective pricing strategies, thus helping them price their services above inflation rates. This pricing power has enabled the company to generate profitable growth while mitigating macro risks from inflation and FX impacts.
• The mobile market in Argentina is stable with TEO serving as one of the three primary players. TEO noted that the company has maintained stable market share and has high exposure to postpaid users due to its premium service quality.
• From an industry standpoint, competitive dynamics in the country are favorable with TEO operating in an oligopolistic market structure with rationale competition and strong growth tailwinds. Management emphasized that favorable competitive dynamics have been a key factor in the industry’s sustainable growth (which is not the case in many other LatAm countries).
• Management noted that Argentina is currently one of the two most affordable countries in the region in terms of ARPU (Average Revenue Per User), implying a potential opportunity for further pricing gains.

Growth Drivers

• Beyond its core business, TEO has focused on creating a vast digital business ecosystem with several revenue generating initiatives. For example, the company recently launched a successful pay TV platform called "Flow," which is being expanded to non-subscribers and helping drive ARPU growth.
• TEO believes there is substantial potential for future growth given the fact that many of the enterprises in Argentina have not yet invested in digitizing their processes.
• TEO is focused on targeting the most important economic sectors in Argentina such as agriculture, mining, and oil & gas given the ability to provide remote connectivity services for industry workers.

Operational Efficiency and Cost Management

• The company has implemented several cost initiatives to increase profitability over the past three years, with the most recent being a 25% reduction in headcount.
• The company also noted that they could see decent upside to profit margins if salary growth remains below inflation.

Macroeconomic and Political Dynamics

• FX and inflation risks remain top of mind for TEO with management. They are taking several measures to mitigate downside risks e.g., hedging a portion of their revenues and having more assets denominated in US dollars.
• The stable exchange rate in FY24 was positive for the company and enabled them to recover lost ground in terms of inflation given their ability to pass through price hikes.
• Looking forward, management remains bullish on the future outlook of Argentina. Milei’s ability to implement reforms, deliver on its budget surplus promise and reduce inflation have translated into strong growth tailwinds for both TEO and the industry. Management believes Milei will continue delivering results on both the macro and political fronts given that he has secured high public approval ratings since taking office.

Balance Sheet

• The company has been active in international capital markets, issuing debt to extend its maturity profile and reduce its cost of debt.
• Net debt / EBITDA is reasonable at between 2x and 2.5x.
• Management is comfortable with current debt levels but would consider paying down debt if and when they have excess free cash flow.
• The company pays dividends in kind via sovereign Argentine bonds in order to circumvent the government’s capital controls.
• TEO’s dividend yield is currently between 2% and 3%, down from about 8% in 2023 due to share price appreciation.

Disclosures

Performance Disclosures

Performance figures are intended for informational purposes only. Historical returns do not reflect actual performance of any specific client. Note that returns will vary for investors not invested for the entire period. Performance figures for ‘Q2 Return’ and ‘YTD Return’ are from 4/01/2024 to 6/30/2024 and 1/01/2024 to 6/30/2024, respectively, and are cumulative. ‘1-Year Return’ performance figures are from 7/01/2023 to 6/30/2024. ‘5-Year Return (Annualized)’ performance figures are from 7/01/2019 to 6/30/2024. ‘Inception-to-Date (Annualized)’ performance figures are from the inception date of the applicable strategy to 6/30/2024. Annualized returns represent the geometric average amount of money earned each year by a hypothetical investment in the applicable strategy above from the beginning of the applicable performance period to 6/30/2024 and takes into account the effects of compounding. Annualized total return provides a snapshot of an investment’s performance but does not give investors any indication of volatility or price fluctuations. Actual performance of individual accounts may vary.

Performance returns: (1) do not reflect the performance of an actual client's account; (2) assume the reinvestment of dividends; (3) are net of a 0.90% annual Titan advisory fee as applicable; and (4) do not reflect or guarantee future results of any specific account. 

--- 

Please note that the performance of any single strategy within our portfolio should not be taken as indicative of overall portfolio performance. Investment strategies, such as those discussed in this content, involve unique risks and clients should not assume that future investment performance will mirror past results. The mention of specific securities or investment strategies does not constitute a recommendation or endorsement. Investment decisions should be based on individual financial circumstances, objectives, and risk tolerance. Past performance is not indicative of future results.

General Investment Disclaimer

Advisory services are provided by Titan Global Capital Management USA LLC ("Titan"), an SEC registered investment adviser. Please refer to Titan's Program Brochure for important additional information. Titan’s affiliate, Titan Global Technologies LLC (“TGT”), is a registered broker-dealer and member of FINRA/SIPC. Both Titan and TGT are subsidiaries of Titan Global Capital Management, Inc.

Statements made in these communications represent opinions and conjecture, and should not be construed as a guarantee of future results. Communications may contain forward-looking statements, which reflect our current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements. We do not undertake any obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. References to specific stock performances are provided for historical context and are not indicative of future results. Valuation assessments in our communications are based on internal analysis and are for informational purposes only. They should not be the sole basis for investment decisions and may differ from others' views or assessments. No warranty is made regarding their accuracy or completeness.

The content provided in this email is for informational purposes only and is not investment or financial advice, tax or legal advice, an offer, solicitation of an offer, or advice to buy or sell securities or other products offered by Titan, TGT, or any third party.



"Do not go where the path may lead, go instead where there is no path and leave a trail." - Ralph Waldo Emerson