Santander Corporate &Investment | We have adjusted our estimates (including its recent acquisition of Cignal in our forecasts). Nevertheless, the main novelty is the modification of our suppositions on the cost of capital to take into account the current interest rate scenario.
The long term history of mobile tower companies remains attractive: (a) the penetration of the subcontracting of towers continues to grow in Europe, with ever more mobile network operators willing to monetise their passive mobile infrastructure; (b) the growth in mobile data traffic supports the sustained need to make the network denser, which could even see itself increased by (c) the future launch of 5G. The greater activity in the shared use of the infrastructure of the active network by mobile operators, which reduces the perspectives of organic growth for tower companies, is also noteworthy.
Corporate transactions remain an essential component in Cellnex´s strategy. Cellnex´s latest emission of convertible bonds (850 Mn€ in June 2019) increases the resources available to the company, especially after the acquisitions agreed with Iliad (Maintain, OP 176€/share) and Salt, which we estimate will absorb almost all the companies capacity to carry out corporate transactions. Cellnex has a good record in mergers and acquisitions, but we also want to point to the greater demand for tower assets, which puts pressure on valuations. Therefore, at this time, we consider it risky to reflect in the price the potential value creation of future corporate transactions. We would like Cellnex to focus its corporate activity on controlling participation in tower assets.
The scenario of interests rates “lower for longer” in Europe is positive for companies whose cash flow presents high visibility (and a long horizon) like the towers sector. However, it seems that there is not much margin for interest rates to fall further. In this scenario, we have reduced the cost of dynamic capital which we maintain for Cellnex to 4.8% – 4.9% (from the previous 5.2%-5.6%), but we have also lowered our long term CPI scenario by 50bp.
We have adjusted our estimates scenario, including the recent acquisition of Cignal, a more conservative calendar for the BTS programme and a lower CPI. The result is a new OP for December 2020 of 39.10 €/share (compared to the previous OP for December 2019 of 30.40€), driven principally by the lower cost of capital.
We continue to like the tower sector, but we also recognise that the valuation of Cellnex offers a limited upside (upward potential of 6.8%, returns of recurrent free cash flow for the shareholders in 2020 of 4.7%) which is why we insist on our recommendation of Maintain.