Description

I believe Cellnex can deliver 54% upside through the end of 2025 for a < 2-year IRR of 24%.

Cellnex is a cell tower operator in Europe. It was previously written up at €39 in March 2020 and at €36 in June 2022. Hopefully the third time's the charm.

Cellnex has about 150,000 points of presence across 12 European countries. The company was spun-off from Abertis in 2015 and since then has been the main consolidator of tower assets in Europe. The top locations are France with 25k sites, followed by Italy with 22k, Poland with 15.3k and UK with 12k.

Cellnex’s stock has been bogged down, in my view, because its free cash flow promise has been perpetually in the future. So far, investors have had to calculate recurring levered free cash flow, but actual free cash flow has been reduced by growth investments. That is about to change. Below is a chart of the company’s RLFCF over the past few years:

As you can see, RLFCF was €1,368m in 2022. On 706.5m shares outstanding that’s €1.9 per share. At the current share price of €33, that’s a 17x RLFCF multiple.

The guidance for RLFCF for 2023 is €1,575, and the company has reiterated guidance of €2,100 for 2025.

The stock is therefore trading at 11x 2025E RLFCF. If the current 17x multiple holds, the stock would go up 54%.

M&A

Cellnex has grown a lot through M&A over the past several years. When interest rates began climbing, the company decided to focus on deleveraging its balance sheet and gaining investment grade status. In conjunction with this, it has also looked at divesting certain assets to take advantage of the public/private arbitrage, since certain cell towers are valued more highly in private markets than they are in public markets.

Management

Management has been competent and hasn’t made any obvious blunders, like expanding into India. Recently, the CEO was replaced with Marco Patuano. I believe this was a positive change as Marco has taken a fresh look at the business and has found numerous places for improvement, like upgrading IT systems, cutting headcount by 20-25% at headquarters, standardizing operations across all 12 countries in which Cellnex operates, etc. He’s talked about these in the earnings calls.

With Patuano coming in, CFO Jose Manuel left. I am told this is because Jose Manuel wanted to become CEO.

Patuano bought 18,500 shares personally at €27 on October 24.

TCI’s Involvement

A big positive in this investment is TCI’s involvement. They own about 9.4% of the stock (a roughly $2 billion stake) and have a board seat. TCI is a long-term investor in solid, stable, growing businesses. Taking a board seat in late 2023 tells me that they are even more committed to their investment and want to see the re-rating that the stock deserves.

Catalyst

So far we could only talk about RLFCF because actual FCF has been burdened by growth investments. When the company finishes its scheduled build to suit programs and achieves investment-grade status, we will start seeing RLFCF turn into FCF and then we will also see a shift in the company’s capital allocation.

This shift in capital allocation will result in higher dividends, hopefully one that grows annually, and perhaps stock buybacks.

The company will report Q4 on Feb 29, and host a Capital Markets Day event in London on March 5th. I expect them to outline their new shareholder remuneration policy—subject to attainment of investment-grade status—at the CMD event.

Catalyst

See above.