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. Main Observations:
- 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.