Small Caps | Feb 25 2021
Uniti Group is poised for rapid growth, having successfully expanded its markets via several acquisitions
-Contracted pipeline now around 202,000 premises
-Stable developer margins should help offset cost inflation
-Strong cash flow but no dividend likely until FY23
By Eva Brocklehurst
Consolidation of several businesses in the fixed wireless, fibre and telco industries has now started to bear fruit for Uniti Group ((UWL)), and all divisions generated improved earnings in the first half.
The wholesale & infrastructure division appears poised for rapid growth, given a contracted pipeline of around 202,000 premises which, if converted to active premises, Canaccord Genuity calculates will add around $79m to operating earnings (EBITDA).
Earnings were ahead of Ord Minnett's forecasts as the OptiComm acquisition was integrated ahead of expectations and assumptions now allow for an increase in private fibre activation rates and growth across all segments, including recently-acquired brands.
The broker, with an Accumulate rating and $2.23 target, raises its valuation on the basis of improved visibility into the delivery schedule of the contract pipeline. Approximately 152,000 premises are expected to go live within the next five years.
Ord Minnett envisages 30,000-35,000 constructed ports and 20,000-24,000 activated ports as a target that can be achieved during FY22-23. There are indications developer margins have remained stable and the broker expects this will assist in offsetting cost inflation.
Cash conversion was a key feature of the first half results and operating cash flow of $26.6m represented a 91% conversion of underlying operating earnings. Ord Minnett notes Uniti Group may be eligible for accelerated depreciation on assets purchased in FY20 which has a potential positive impact on cash flows.
Canaccord retains a Buy rating with a $2.60 target, highlighting further catalysts include more detail on private fibre activation levels in the second half as well as the opportunities for expansion in adjacent markets.
FY21 guidance for operating earnings of $116m has not been upgraded, although the company has indicated organic growth is likely to accelerate. Active services on owned fibre infrastructure are expected to double in less than five years.
Bell Potter increases the multiple in its valuation and reduces the applied cost of capital. The net result is a 14% increase in the target to $2.50 with a Buy rating maintained.
The broker likes the stock for management's extensive experience in the telecommunications industry and strong cash flows and does not expect any dividends until FY23, assuming the short-term focus will be on reducing debt. Furthermore, whether or not the company pays a dividend will be heavily dependent on M&A activity over the next couple of years.
Divisions
Wholesale & infrastructure operating earnings of $20.2m reflected a six-week contribution of $6.2m from OptiComm. The consumer & business segment was affected by a greater number of customers on owned infrastructure as well as cost increases. Margins declined to 1.5% in this segment and operating earnings totalled $2m.
Canaccord Genuity notes a two-month contribution from the Harbour ISP acquisition and the focus is now on net customer additions in order to lift infrastructure revenue per unit in time. In the third segment, CPaaS – formerly specialty services – operating earnings totalled $10m which included an additional five-month contribution from 1300 Australia.
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