BUY HOLD SELL – Uniti Group (ASX: UWL)
A lovely subscriber wrote in and requested that I take a look at Uniti Group (ASX: UWL) – so here goes. UWL is a diversified provider of telco services that has been covered by Chris in Chart of The Day and put in as a trade in the TRADING IDEAS section of the newsletter. It has had an impressive start to the year, up almost 100% helped by an acquisition and improving housing market conditions.
UWL is a left-field way to play the housing boom, as it is a ‘last mile’ installer of network infrastructure, specifically in greenfield housing developments. Earlier in the year, there was even chatter that Macquarie’s infrastructure and real assets arm (MIRA) and Aware Super could be interested in the company, as it is a highly complementary business to Vocus Group (VOC) which was taken over by MIRA and Aware Super in March.
The company’s half-year results revealed a convincing beat on adjusted profit, jumping 6% on the announcement. Revenue and adjusted EBITDA both surpassed estimates. It also completed a slew of acquisitions buying Telstra’s Velocity & South Brisbane exchange assets for $140m. It bought Harbour ISP, which specialises in the delivery of retail broadband services in greenfield developments and to cap off the spending spree, OptiComm, an open access, Fibre-to-the-Premises (FTTP) wholesale network infrastructure operator.
The slides from the half-year presentation use all the right adjectives to describe how it is now positioned for accelerated organic growth. Earnings expected to be dominated by its ‘core’ fibre infrastructure with an increase from 63% to 82% of group earnings expected over the full year. CEO Michael Simmons reaffirmed that point, noting the business has transformed into a core infrastructure owner and operator with the unique advantage of having ‘locked-in’ organic growth. That’s thanks to its large and growing contracted fibre order book. ‘Locked-in’ refers to the ~$240m in contracted revenue with the majority (75%) to come over the next five years.
Nick MacLean, a portfolio manager at Surry Asset Management, believes margin growth will come from data demand, activating existing fibre connections and of most interest, expanding its presence as a Retail Service Provider (RSP). Previously UWL provided fibre assets for other RSP’s they now have their own RSP after buying Telstra’s Velocity. The crux is that they can capture a bigger piece of the pie as a provider of vertical services beyond just the cable, offering solutions for things like CCTV and perimeter wi-fi services.
On the macro side, UWL is looking down the barrel of a $4.5bn spending program from the federal government, announced in September last year as calls for an NBN 2.0 become louder. The current infrastructure, even from our own experience in the new Marcus Today office, can be miserable. People want fast connections; fast upload and download speed, and not for the internet to cut out at 9:30 am every morning (that’s publishing time!)
That said, there are arguments that question fibre’s future. Spark Infrastructure (SPK) last year reconfirmed its wireless strategy, touting its objective for 80% of its relationships to be on wireless technologies within the next three years, citing better margins and flexibility. A trend to wireless experiences and the internet of things validating that shift.
- ROE of 7.7% is OK. Forecasts see it improving to 8.9% in FY23. Peers in 5GN and SSM sit on 5% and 11.6% respectively.
- A PE of 35.9x isn’t what you’d call cheap but in comparison to 5GN on 42.9x and SSM on 10.3x it’s somewhere in the middle(ish)
- Revenue and EPS growth are positive with progress expected into FY23
- UWL a favourite of the brokers, 100% of the brokers surveyed by Thompson Reuters (4) rate it as a STRONG BUY or BUY.
WHAT SORT OF INVESTMENT IS UWL?
UWL has set itself up as a growth play. It has a level of safety in contracted revenue and is supported by the domestic housing boom. Recent data from the ABS showed housing approvals jumped more than 85% since March last year. The bedding down of fibre infrastructure businesses OptiComm, Telstra Velocity, as well as consumer telecoms providers, Harbour ISP and LBNCo, adding what it describes as scale and relevance to its operations.
Not a lot of broker coverage, Ord Minnett out with an ACCUMULATE rating in February, observing 1H operating earnings were ahead of expectations, noting that outperformance had been driven by the integration of the OptiComm acquisition and improving housing market conditions. Target price lifted 8.3% to 223c. That said, it is a few months old, so the target is a bit dated. Goldman has a more recent rating of BUY with a 300c price target.
Back in September NEXTDC and PIPE Networks founder Bevan Slattery reportedly bought 5m shares, reflecting a 1% interest in the company. Slattery was supposedly attracted by UWL’s growing ‘empire’ of wholesale and consumer internet-based businesses. Unfortunately, that transaction doesn’t pop up in the Reuters list, perhaps disguised as a private company or several companies. Having Slattery on the shareholder list is a strong validation for the business.
UWL has had a solid start to the year, up more than 125% since its low in October. There appears to be some short-term resistance around the 290c level. RSI has also moved back from overbought territory. Recent price action threatening to break its strong uptrend. One explanation for the short-term weakness is the pickup in inflation worries, which is a headwind for growth stocks that have struggled on the back of negative momentum and rotational factors.
The communications sector, in which UWL operates, is off lows and tracking slightly ahead of the ASX 200, up ~10% for the year vs the market up ~7.3%. The sector is largely dominated by TLS which is up ~25% in the last six months. When you look at the sector breakdown, you can see over the last six months, the likes of TPG, SPK, CNU and HTA are not performing nearly as well.
Short sellers pilled on after questions were raised about UWL’s acquisition spree and capital raising. The trend now moving lower, off December highs.