Company Reports

Narrow-moat Cellnex performed nicely in its first quarter with strong colocation growth that drove tenancy ratios up and expanded the EBITDA after leases margin by 130 basis points year on year to 56.5%. Revenue grew 7.5% organically, 4.3% of which came from low capital-expenditure activities, colocation, and escalators. Italy and Portugal were the standouts given they have intense competition among mobile operators, with tenancy ratios expanding to 2.15 and 1.77 times respectively, from 2.05 and 1.67 last quarter. We maintain our EUR 52 fair value estimate and shares offer an important upside. Investors might need to be patient as we don’t see any imminent catalysts. Cellnex's share price is sensitive to changes in interest rates given its high leverage, so a potential reduction in interest rates could aid the share price and bring it closer to our fair value.

Cellnex is the only pure independent tower firm of large scale in Europe (Inwit and Vantage Towers are not fully independent as they are controlled by mobile network operators). Since its inception, Cellnex’s strategy has been to acquire European wireless tower portfolios from MNOs and then lease the towers back to those MNOs while adding other tenants to take advantage of the towers’ operating leverage. MNOs find value in Cellnex’s proposition as they can monetize towers at good valuations and use the proceeds to reduce debt. Transactions are structured as sale and leaseback and provide Cellnex with long-term revenue and cash flow visibility, underpinned by its contracts (10- to 25-year durations), which include annual rent escalators often tied to inflation.

Narrow-moat Cellnex met its full-year guidance, with revenue of EUR 3.7 billion and free cash flow of EUR 150 million. The firm reported EBITDA after leases for the first time, which we view as favorable as it is a better reflection of economic reality for a tower firm than EBITDA. Its EBITDAaL grew by 17% for the full year compared with revenue growth of 15%, suggesting little margin expansion. Although Cellnex tenancy ratios are improving in selected locations like Portugal and Italy, which is good for margin expansion, organic colocation remains very weak in markets like Austria, Sweden, and Ireland. Cellnex’s build-to-suit programs remain intense, with 4,473 new tower sites in 2023, which also creates dilution in tenancy ratios. The group’s tenancy ratio has improved to 1.39 tenants per tower compared with 1.35 one year ago, mainly driven by improvements in Italy and Portugal. We assume Cellnex’s tenancy ratios will improve gradually to around 1.8 times by the end of the decade, resulting in a steady EBITDAaL margin improvement. We maintain our EUR 52 fair value estimate.

Cellnex is the only pure independent tower firm of large scale in Europe (Inwit and Vantage Towers are not fully independent, as they are controlled by mobile network operators). Since its inception, Cellnex’s strategy has been to acquire European wireless tower portfolios from MNOs and then lease the towers back to those MNOs while adding other tenants to take advantage of the towers’ operating leverage. MNOs find value in Cellnex’s proposition as they can monetize towers at good valuations and use the proceeds to reduce debt. Transactions are structured as sale and leaseback and provide Cellnex with long-term revenue and cash flow visibility underpinned by its contracts (10- to 25-year durations), which include annual rent escalators often tied to inflation.

There were no surprises in narrow-moat Cellnex’s third-quarter results. Revenue has grown by 16.9% in the first nine months of the year, with EBITDA after leases up 20%. Cellnex is finally experiencing slight operating leverage, with EBITDAaL margins up 140 basis points year over year. However, we want to see an even stronger focus on organic growth (co-location) as Cellnex needs to improve its tenancy ratios to make the most out of the tower firm operating model. Last quarter new CEO Marco Patuano gave encouraging remarks during Cellnex’s earnings call that indicated a new focus on co-location growth. Co-location growth has been softer this quarter compared with the previous one, with 582 new co-locations compared with 1,255 in the previous quarter. However, co-location growth has indeed been quite strong in the previous four quarters. Cellnex’s tenancy ratio stands at 1.38 tenants per tower, compared with 1.36 a year ago. We are maintaining our EUR 52 fair value estimate.

After a long stretch of overvaluation, sentiment around the wireless tower industry has swung the other way. Each of the five independent tower firms we cover globally is now undervalued relative to our fair value estimates and trading in a 4- or 5-star range. Though the stocks have been volatile, especially around interest rate movements, we haven’t seen much change to the companies’ fundamentals. We believe tower firms have long-term secular tailwinds, great business models that include contractual recurring revenue with annual escalators, and narrow moats. In our view, the market has presented a compelling opportunity.

The main highlight of Cellnex's second-quarter earnings is the new narrative by CEO Marco Patuano after only 60 days in charge. For a long time we've talked about Cellnex's opportunity to make its tower portfolio more efficient (tenancy ratio of 1.37 times compared with Inwit at 2.2 and Vantage Towers at 1.46), but we're still waiting for this opportunity to materialize. Acquisitions aside, in recent years Cellnex put more focus on deploying new towers (build-to-suit towers) for mobile operators rather than co-locating them in existing ones. Newly deployed BTS towers, which normally come at a tenancy ratio of 1 times, generate returns that match Cellnex’s cost of capital, but don't expand it. The beauty of the tower model is to co-locate new tenants in existing towers as revenue increases significantly while costs hardly go up, expanding profit margins substantially. We noticed a shift in its narrative to co-location in the July 27 earnings call, which is “free” growth for Cellnex (little investment needed). We maintain our EUR 52 fair value estimate with shares up 5% on July 28 and trading at EUR 38.

Narrow-moat Cellnex's first quarter results included 6.8% organic growth in points of presence (6.0% last quarter), with revenue from build-to-suit and co-locations growing 7.8%. Italy, Spain, and Portugal, which represent one third of Cellnex’s portfolio, continue to increase tenancy ratios at a very healthy clip. Since last year, Spain has expanded its tenancy ratio by 3.5%, Italy by 5.3%, and Portugal by 17%. These three markets highlight how important competition among mobile operators is for tower companies, as they all count four or more mobile operators and are competitively intense, which results in more radio equipment being deployed at towers by operators. Remainder geographies’ tenancy ratios all remained stable. Lease payments came in at 28% of revenue, as the timing of lease payments is usually more concentrated in the first half of the year. We are maintaining our EUR 52 fair value estimate.

Cellnex is the only pure independent tower firm of large scale in Europe (Inwit and Vantage Towers are not fully independent, as they are controlled by mobile network operators). Since its inception, Cellnex’s strategy has been to acquire European wireless tower portfolios from MNOs and then lease the towers back to those MNOs while adding other tenants to take advantage of the towers’ operating leverage. MNOs find value in Cellnex’s proposition as they can monetize towers at good valuations and use the proceeds to reduce debt. Transactions are structured as sale and leasebacks and provide Cellnex with long-term revenue and cash flow visibility underpinned by its contracts (10- to 25-year durations), which include annual rent escalators often tied to inflation.

Narrow-moat Cellnex's fourth-quarter results were more or less a reiteration of what we already heard last quarter. Management remains committed to getting an investment-grade rating from Standard & Poor's while executing its organic business plan. Cellnex could also sell minority stakes in some of its subsidiaries to unlock hidden value and accelerate the investment-grade rating process. We believe this measure will have a neutral impact on shareholders, as it would raise cash and optically strengthen Cellnex’s balance sheet, but would also entitle any minority investors to dividend payments. We maintain our EUR 52 fair value estimate.

Narrow-moat Cellnex shares are up 8% at the time of the writing given news reported by El Confidencial about a potential takeover offer from American Tower and Brookfield. The two firms have reportedly hired Morgan Stanley to evaluate an offer. We are not surprised by this announcement given several U.S. firms and private equity funds have been laying their hands on European infrastructure in the past two years. American Tower already acquired 30,000 sites from Telefonica in early 2021 in Spain, Germany, and Latin America, in a EUR 7.7 billion deal. Brookfield acquired a stake in Telia’s towers in Sweden, Norway, and Finland during 2022, as well as a 51% stake (together with DigitalBridge) in Deutsche Telekom’s 40,000 towers in Germany and Austria. Other U.S. private equity funds like KKR and Global Infrastructure Partners are currently participating in the acquisition and delisting of Vantage Towers, Vodafone’s tower division, a deal that was announced in November 2022. We maintain our EUR 52 fair value estimate for Cellnex.

There is a lot to like in Cellnex's third-quarter results. Management has listened to investors and in a strategic update has set deleveraging as its first capital allocation priority right now. Cellnex shares have performed poorly year to date, with investors being worried about leverage, which is around 7 times net debt/EBITDA (peers at around 5 times). In the Nov. 11 update, management committed to get an investment-grade credit rating from S&P in the next 12 to 24 months. Although Fitch Ratings has a BBB- credit rating for Cellnex (investment-grade), S&P's rating remains BB+. An upgrade would allow Cellnex to access debt markets at better terms and calm investors’ concerns around leverage, in our view. Shares are up 5% at the time of writing. Although we have already commented that Cellnex is a company that can withstand high levels of debt due to its contracts and long-term cash flow visibility, we like management's focus on bringing debt down to lower levels. We maintain our EUR 52 fair value estimate, with shares still providing 35% upside.

We believe the current weakness in equity markets provides a unique opportunity to buy shares of narrow-moat Cellnex. Not only do Cellnex shares provide 55% upside at current prices (our fair value estimate is EUR 52), but they also offer all the ingredients to protect investors during recessionary times. Cellnex owns and operates critical infrastructure (wireless towers), its cash flow benefits from high inflationary environments due to its contracts, and it's protected against interest-rate hikes and increases in energy prices. The stock market is anticipating that rising interest rates will hit Cellnex's acquisitive business model, but we see it as an over-reaction given the Cellnex story will likely become more organic. Cellnex has no sizable debt maturities until 2026, significant fixed-rate refinancing capacity, and cash on the balance sheet. In addition, its recent withdrawal from the auction of Deutsche Telekom Towers is a derisking event for our thesis. In the past we had concerns that Cellnex management would be willing to undertake M&As at almost any cost, but its withdrawal from this auction has highlighted management's discipline. Our forecasts and assumptions are conservative compared with consensus and management guidance.

Cellnex is the only pure independent tower firm of large scale in Europe (Inwit and Vantage are not independent, as they are controlled by mobile network operators). Cellnex’s strategy is to acquire European wireless tower portfolios from MNOs and then lease the towers back to those MNOs while adding other tenants to take advantage of the towers’ operating leverage. MNOs find value in Cellnex’s proposition as they can monetize towers at good valuations and use the proceeds to reduce debt. Transactions are structured as sale and leasebacks and provide Cellnex with long-term revenue and cash flow visibility underpinned by its contracts (10- to 25-year durations), which include annual rent escalators often tied to inflation.

Apart from a good set of results, which indicate narrow-moat Cellnex could end the year in the higher part of its guided range, the most interesting insights from the second quarter came from management’s comments on the Deutsche Telekom towers unit deal and future strategy. The main reason Cellnex withdrew from the auction process was its potential inability to execute a long-term plan under Deutsche Telekom's conditions, rather than a lack of financial attractiveness, as management said the internal rate of return from the deal was actually attractive. The deal that Deutsche Telekom's towers unit has made with DigitalBridge and Brookfield includes significant protection rights and the right to regain control of the asset in future. We believe Cellnex wasn't willing to accept these conditions as the company claims to be focused on the long term, has a 30-year investment horizon, and considers control of its assets a key strategic point. More importantly, we believe this decision reduces one of the main risks we had highlighted about Cellnex in the past, which was management potentially wanting to close deals at any cost. Management also provided a pipeline of other deals the company has rejected since 2016 due to unattractive valuations or other disagreements with sellers. We maintain our EUR 52 fair value estimate and see the shares as attractive currently at this point.

In a statement to the Spanish stock regulator Comision Nacional del Mercado de Valores, Best Idea Cellnex announced on July 13 it has officially withdrawn from the auction to acquire Deutsche Telekom’s 40,500 towers in Germany and Austria. We are surprised by the announcement, as we believe Cellnex was in a good position to secure the deal. Cellnex offered no antitrust regulatory hurdles (it has no presence in Germany), it had an ongoing relationship with Deutsche Telekom (it had bought towers from DT in the Netherlands during 2021) and is purely focused on Europe in the long term. According to reports by Bloomberg and Reuters, the bid from a consortium of private equity firms (including KKR) seems to be the favored one, and we expect Deutsche Telekom to sell only a minority stake to these players. Although Deutsche Telekom's towers unit was probably the last sizable tower portfolio for sale in Europe, the Cellnex story remains unchanged. We maintain our narrow moat rating and EUR 52 fair value estimate, which represents 24% upside at July 13 prices. Our fair value estimate for Cellnex is mainly organic, meaning it considers little upside from future mergers and acquisitions.

Cellnex is the only pure independent tower firm of large scale in Europe (Inwit and Vantage are not independent, as they are controlled by mobile network operators). Cellnex’s strategy is to acquire European wireless tower portfolios from MNOs and then lease the towers back to those MNOs while adding other tenants to take advantage of the towers’ operating leverage. MNOs find value in Cellnex’s proposition as they can monetize towers at good valuations and use the proceeds to reduce debt. Transactions are structured as sale and leasebacks and provide Cellnex with long-term revenue and cash flow visibility underpinned by its contracts (10- to 25-year durations), which include annual rent escalators often tied to inflation.

We believe the current bear market offers an opportunity to buy shares in narrow-moat tower firms Cellnex and Inwit. Tower firms enjoy switching costs as they provide critical infrastructure to mobile operators. Their long-term contracts provide cash flow visibility. Tower firms benefit directly from inflation, as their contracts have consumer price index escalators that flow directly to the top line while operating expenses are less affected. Inwit estimates it will have incremental 1% growth in EBITDA (EUR 5 million) for every 1% increase in inflation. We also expect Cellnex to benefit from inflation, but to a lesser extent, given how its contracts are structured. Cellnex and Inwit provide 45% and 15% upside, respectively.

Cellnex's first-quarter results came in as expected, with 6.5% organic growth in points-of-presence. Forty percent of this growth came from new build-to-suit towers, 20% from new colocations in existing towers and the remaining 40% from inflation tailwinds. Cellnex benefits from inflation due to its contracts and is hedged against energy price increases because it can pass on energy costs to tenants. We maintain our EUR 52 fair value estimate with shares offering 15% upside at this point.

We are adding narrow-moat Cellnex to our Best Ideas April 2022 list given the company’s competitive advantages, attractive unit economics and 20% upside potential compared with our EUR 52 fair value estimate. Cellnex’s 10- to 20-year tower contracts with mobile operators provide high cash flow visibility with growth optionality coming from new tenants which, coupled with towers’ operating leverage, will result in continued margin expansion. Our narrow moat is supported by switching costs as many mobile operators have no network alternatives to Cellnex’s towers. Cellnex also provides inflation protection with contracts tied to consumer price indexes, while cyclicality is low given the critical nature of wireless infrastructure. In future, we model revenue growing at midsingle digits with EBITDA margins expanding from 52% currently to more than 65% in 2030.