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Introduction
Slightly over a 12 months in the past, I wrote an article about Cellnex Telecom ( OTCPK:CLNXF ) that European counterpart American Tower ( AMT ) and Crown Fortress ( CCI ) have been (and nonetheless are) buying and selling at a major value
Cellnex Telecom is a Spanish firm and its major itemizing (ticker CLNX) on the Madrid Inventory Trade is by far essentially the most liquid itemizing. The common day by day quantity is 1.4 million shares and the present market capitalization is slightly below €24 billion primarily based on the present variety of shares.
The period of low-cost debt is over
Cellnex’s enterprise mannequin was/may be very easy. It builds, owns and leases cell towers to phone corporations. Very simple. This additionally implies that the preliminary value of constructing the towers is excessive, however as soon as they’re up, the capital value of upkeep can be minimal.
Whereas web revenue is not the most effective metric by which to evaluate Cellnex, it is an necessary start line for calculating an organization’s backside line of free money movement.
As you may see under, the cellphone tower operator reported whole income (which it calls “working revenue”) of €4.05 billion, and because the earnings report exhibits, the working prices of protecting the towers up and working have been simply over 1 ,1 billion euros. . Depreciation prices of €2.55 billion truly signify about 70% of whole working prices. Because the sustaining capex is far decrease (I am going to talk about this later on this article), the underlying money movement figures are a lot increased than the reported working revenue of €374 million.
As you may see above, the overall quantity of economic prices exceeded 800 million euros, which is greater than 10% greater than in 2022. Later on this article, I’ll talk about the sensitivity of the corporate to rates of interest. Extra importantly, all of this stuff resulted in a pre-tax lack of €436 million and a web lack of €316 million, of which €297 million was attributable to Cellnex shareholders. With simply over 700 million shares excellent, the online loss was round €0.44 per share, which was nearly the identical outcome because the earlier 12 months.
The online loss is definitely not excellent to see, however let’s check out Cellnex’s money movement figures as a result of that is what actually issues. As you may see under, whole working money movement was roughly €2.07 billion and roughly €2.05 billion after web of adjustments in working capital. Be aware: This contains €181 million in taxes to settle deferred tax liabilities, though in accordance with the earnings report there have been no taxes.
From this outcome, we nonetheless need to deduct 651 million euros within the type of lease funds, in addition to 2 million euros within the type of dividend funds to non-controlling pursuits. This interprets to an adjusted working money movement of roughly €1.4 billion.
As you may see within the picture above, Cellnex has spent round €2.2 billion constructing new cell towers. This implies the corporate was largely cash-flow-breakeven after additionally considering €631 million in proceeds from the sale of property.
It goes with out saying that the overwhelming majority of capital expenditures encompass enlargement capital expenditures. The image under clearly confirms this. As you may see, upkeep capital expenditure was €139 million, whereas enlargement capital expenditure was roughly €1.4 billion, together with build-to-order (“BTS”) capital expenditure.
Which means that excluding asset gross sales and assuming adjusted working money movement of EUR 1.4 billion, the underlying free money movement outcome was roughly EUR 1.26 billion, and this contains EUR 181 million in money taxes paid, in accordance with money movement assertion. Excluding this, underlying free money movement would have been €1.44 billion, representing FCF in extra of €2 per share.
After all, it’s “hidden” by excessive cap prices. And whereas this funding will definitely improve, the market has turn into a bit involved concerning the web debt of €20.1 billion as of the tip of 2023.
Be aware that the €20.1 billion additionally contains lease liabilities. Internet monetary debt, excluding lease liabilities, was roughly €17.4 billion. Together with lease obligations, the online debt-to-EBITDA ratio was near 7. Though it is a regular ratio for REITs, and though Cellnex is a REIT-like firm, the market signaled that it was involved concerning the accumulation of debt regardless of that the Cellnex towers have been topic to a mean contract period of 31 years (together with the anticipated extension).
Lengthy-term plans are pleasing
This message was nicely obtained by Cellnex administration and the corporate launched an up to date capital allocation plan for the subsequent few years. As you may see under, the corporate is asking the present part its “subsequent chapter,” during which decreasing debt and rewarding shareholders can be high priorities.
The important thing pillars are a decrease debt ratio that can be decreased to 5-6 instances EBITDA over the subsequent three years, whereas the corporate will spend €3 billion on dividends and spend €7 billion on buybacks, particular dividends and potential (smaller) M&A alternatives. Cellnex goals to cut back its debt ratio by 0.4-0.5 instances EBITDA per 12 months by way of a mixture of debt discount and better EBITDA outcomes.
Assuming €3 billion in dividends unfold over 5 years, the typical annual dividend could be €600 million per 12 months (beginning with “minimal €500 million from 2026” and projecting a mean annual progress fee of seven.5%). which is roughly 85 cents per share. Based mostly on the present share value, this is able to signify a dividend yield of simply over 2.5% (topic to Spain’s 19% dividend tax). It is definitely not the very best yield, however €10 billion in whole money movement is necessary, because it means round €14 per share can be generated by the tip of the last decade.
The rise in free money movement will assist finish the build-up to fulfill the slowly winding down capital spending program.
Extra importantly, Cellnex has additionally secured rapid targets. Free money movement is anticipated to be €300 million and €400 million in 2024 and 2025, respectively, and this nonetheless contains important funding in progress. Common credit score facility FCF (together with curiosity funds and lease funds, however excluding capital expenditures) can be €1.7 billion this 12 months and can improve to at the least €2 billion in 2025.
And that is what’s necessary to me. 2025 steering requires almost €3 per share in underlying free money movement per share. The overwhelming majority will nonetheless be spent on progress (and the affect is seen in EBITDA steering, which can present progress of seven% in 2024 after which one other 6% in 2025), however reported free money movement, together with progress, will improve as nicely.
For FY2027, the corporate forecasts RLFCF of €2.2 billion and reported FCF of €1.2 billion.
Projected increased curiosity prices ought to be factored into 2027 steering, however Cellnex can be very lucky to have mounted rates of interest on almost 80% of its debt. The corporate expects that, primarily based on present market charges, it will likely be capable of preserve its common value of debt at or under 2.6% by way of 2027.
The determine above exhibits that 2028 can be an necessary 12 months for Cellnex, because it might want to refinance round €3.7 billion of current debt. It is about 20% of the overall debt, however I am not too anxious. Assume that not a single greenback of debt is repaid and that the €3.7 billion is refinanced in full. Assume that the price of debt will improve by 250 bp. This is able to improve curiosity bills by €92.5 million, which is simply 4% of RLFCF. So sure, there could be a noticeable affect, however the affect would nonetheless be simply managed.
Provided that the corporate can be producing tons of of thousands and thousands in free money movement, I would not be shocked to see it use a few of that money movement to cut back financing wants, additional decreasing the affect on free money movement efficiency.
Funding thesis
Whereas I definitely perceive that the market will not be too eager on a leverage ratio of 7x EBITDA, we at the moment are at “peak debt” and the corporate’s free money movement will improve and EBITDA may also improve. . The EV/EBITDA ratio is presently round 15, but when we use a 2025 EBITDA steering of €3.45 billion and assume that free money movement in 2024-2025 will cut back web debt to €20 billion, the ratio EV/EBITDA will fall to round 12.5 and can proceed to say no (relying on Cellnex’s closing capital allocation plans).
I am extra excited about Cellnex hitting its free money movement steering, as this implies the corporate is buying and selling at a free money movement yield of round 9%, which I believe is a horny valuation for a European chief in its phase.
I do not presently have a place in Cellnex Telecom, however I’ve written put choices which might be presently barely brief. Because the firm now has a transparent plan for the close to to mid-term future, I want to open a protracted place inside the subsequent few months.
Editor’s Be aware: This text discusses a number of securities that aren’t traded on a serious US change. Concentrate on the dangers related to these shares.