In the last year, during which it launched its IPO, Cellnex has doubled its portfolio of towers with the purchase of 7,677 in Spain and Italy, increasing revenues (€ 613 million, +40%) and EBITDA (€ 235 million, +32%). But the purchases have weighed on profits and the company’s dividend yield is lower than 1%, with very demanding multiples: a P/E ratio of 49,7x.
Since it went public in May 2015, Cellnex’s share price performance has been positive relative to the index, dropping 1.6% versus a decline of 19.5% in the IBEX 35. In this article, we analyse Cellnex’s business model and its financial situation, as well as its results and prospects. The aim is to decide whether this is an interesting investment option for the medium-longterm.
Company overview: business model
Cellnex Telecom is the leading independent operator of wireless telecommunications’ infrastructure in Europe. It was born of the demerger of Abertis Telecom from its parent company Abertis in 2015. Its operations focus on Spain and, following its buy of TowerCo and Galata, also on Italy.
Cellnex business model is divided into three areas:
– Infrastructure for mobile telephony (49.4% of sales in 2015). The business is based on renting space in its sites for operators to install their equipment and antenas to offer telecommunications services to their customers. They are long-term contracts with an average duration of 20 years and usually inflation-indexed, which provide safe and stable flow of cash over time. This is currently Cellnex’s main area of business. It is also where it has more opportunities for growth through consolidation in the markets where it operates (Spain and Italy), as well as expansion into new mature markets in Europe (UK, Germany, France,…).
– Audio-visual broadcasting networks (36.7% of sales). This division manages the broadcasting and transmission of DTT signal and radio in Spain. It is also responsible for the operation and maintenance of these signals’ distribution networks and the audiovisual services’ offer. This activity is exclusively developed in Spain, where it is the leading operator at a national level, with 87% market share in DTT and radio. DTT business represents 90% of the division’s total sales and its 5 main customers are RTVE, Mediaset España, Atresmedia, Net TV and Veo, which generate 83% of TV revenues. The radio business (10% of sales) has a lower concentration, but remains strong with 66% of revenues generated by the top 5 customers: Cope, Ondacero, RNE, Catalunya Radio and Grupo Radio Blanca.
– Network services (security, smart cities…13.9% of sales). It provides connectivity and co-location, emergency radio services, Smart Cities projects that improve services for citizens through networks and services which facilitate municipal management.
Abertis remains the largest shareholder (previously the sole shareholder) after the IPO, with 34% of capital. In the IPO various investment funds such as Threadneedle (7.76%), Blackrock (6.22%), Cantillon Capital Management (3.02%) and Fidelity (1.5%) became stakeholders. La Caixa has a 4.62% stake and the remaining 43% is free float.
Cellnex’s strategy for the coming years is based on two pillars:
- Analysis of inorganic growth opportunities offered in Europe, in the context of telecommunications sector consolidation and the decision of telephone operators to separate and outsource their infrastructure networks.
- Growth and organic development. The axes of this organic growth and development are:
– Rationalization of sites (about 2,000 in the medium term) through agreements with telephone operators to optimize their cost structures and investment needs. The construction of 400 sites in Italy until 2021 to provide service to WIND, as part of the agreements closed in 2015 with the acquisition of Galata.
– Optic fibre connection with sites which are key to the effective deployment of broadband mobility services by the company’s clients.
– Services management agreements in countries that are no longer a priority in the company’s strategy.
– Deployment plans for the new generation of “small cells” to improve the service in large metropolitan areas.
As part of its strategic plan, Cellnex has approved an efficiency programme for 2016-19 in order to cut operating costs. It will take action on various issues: land rents, energy and network costs. In rents, it intends to renegotiate contracts and make cash advances with the aim of reducing the annual rent and extending the current contract period. It expects to save € 14 million in rental costs. It also aims to reduce consumption and energy tariffs in 800 sites, as well as redesign and renovate the transport network by revising processes and renegotiating contracts. Most of the savings will be visible at the end of the period (2018-19).
Cellnex closed 2015 with € 613 million in revenues, 40.6% up on a year earlier. EBITDA stood at € 235 million (+ 32%), EBIT at €63 million (-27.6%) and net profit at € 48 million (-20%). The revenues increased by 40.6%, thanks mainly to growth in the business of mobile telephone infrastructures (up 183% at €303 million), contributing 49.5% of total revenues. This activity has performed strongly thanks to acquisitions and to strong organic growth of 8%. This is due to PoPs (or points of presence) at existing towers, 4G deployment and network densification. Over the year, they have doubled the number of towers with 7,677 new towers acquired in Spain and Italy.
The revenues from audio-visual broadcasting networks decreased by 10% to € 225 million due mainly to the closure of nine DTT channels in 2014. The revenues from network services increased by 7.5% to €85 million.
Adjusted EBITDA increased 32% to € 235 million, with operating costs growing by € 120 million to € 378 million (+46.5%) due to the increase in rent expenses (+129%) and supplies (+119%). The increase in costs is due to acquisitions and organic growth (+ €108 million) and costs transferred to customers (+ €12 million). EBITDA margin fell 3 percentage points from 41% to 38%. Without the M&A operations in 2015, the adjusted EBITDA margin would have increased 2 percentage points, from 41% to 43%. But the M&A deals and the afore-mentioned shutdown of DTT channels had an impact of -5pp in the margin, resulting in a net impact of -3pp.
The acquisition of Galata has had a strong impact on amortizations (+69%) and on non-recurrent costs. These have also been affected by expenses related to the IPO, resulting in a 27.6% fall in EBIT. Net profit declined 20% to €48mn, reflecting the impact of deferred taxes due to the change in corporate tax in Italy.
At end-2015, Cellnex had a total of 15,119 sites (7,709 in Italy and 7,410 in Spain) compared with 7,493 in 2014. Organic growth in the points of presence (PoPs) was 8% higher than in 2014, while the occupancy ratio grew to 1,53 at year-end from 1,51 in September.
This is a reflexion of the company’s commercial activity, having sealed new contracts to provide services to mobile and telecommunication operators, as well as audiovisual groups, in both Italy and Spain.
At end-2015, the company’s net debt stood at €928mn (+171%) up from €342mn in 2014, after financing the €693mn purchase of the WIND portfolio of towers. The annualised net debt/EBITDA ratio was 3.7x in December 2015.
In July 2015, Cellnex launched a €600mn bond issue (54% of financial debt in H1’15), with a 7-year maturity and a coupon of 3.125%. After this issue, the company has a stable long term debt structure (average loan life of 6.6 years compared to 3.9 years before the bond issue). The average cost of debt is 2.2%, there are no maturities due until 2020 and 54% is refinanced at a fixed rate. Furthermore, the covenants which limited dividends no longer exist (DN/EBITDA >4.5x) and debt (DN/EBITDA<5x).
Investments over the period totalled €787mn, with €740mn earmarked for expansion (€693mn for the purchase of Galata in March and €44mn for a group of 300 towers from Telefonica in January).
The remaining €47mn was used for the maintenance of installed capacity and for investments linked to new revenue sources such as, for example, the rationalisation of the telephone towers park. According to analysts’ estimations, capex will be controlled from 2016, after the uptick in 2015.
Cellnex’s cash flow is solid and attractive. The company plans to distribute 20% of its recurrent operating leveraged FCF as a dividend (adjusted EBITDA-maintenance CAPEX-working capital-interest and taxes). The company will pay a gross complementary dividend against its 2015 results of €0.047 per share, which implies a dividend yield of less than 1%. This is not attractive, but it is justifiable, as there are lots of opportunities to continue to growth inorganically in the European market.
Risks affecting the company
The main risks which could affect Cellnex’s share price are:
- Abertis selling or cutting its 34% stake. We believe however that this is not very likely as Abertis has a very healthy cash position and there are not many investment opportunities at the moment.
- Dependence on interest rates. The share prices of the companies in the sector have a high correlation with levels of sovereign bond interest rates, which could also become the case for Cellnex. But we don’t see this as a short-term risk, since we don’t think there will be any drastic uptick in sovereign bond rates.
- Regulatory changes. Tightening of norms regarding radiation which limit the number of operators and antenas per site.
Cellnex is a growth investment opportunity. It can take advantage of sector consolidation in Europe, as well as offering a great potential for organic growth, particularly in its telecommunications’ infrastructure business. And this will be supported by its current debt structure, combined with its controlled investment and ability to generate high cash flow levels. That said, Cellnex is trading at very demanding multiples (PER16E 49.7x and EV/EBITDA16E 15.1x). So in our view, the current share price doesn’t have revaluation potential. Although the company’s profile justifies paying a premium, we think that currently this is too high. We would recommend to wait for some dips in the stock market to start to build up a position with a medium-long term view.