Description

Consolidated Communications (CNSL) is a telecom operator backed by a strong private equity sponsor to embark on an aggressive fiber to the home (FTTH) upgrade plan. This should return the company to growth in 2022 and cause a re-rating of the stock over the next few years. In effect, CNSL is a publicly traded LBO and as they execute on their plan, the stock could be a 3x over the next 5 years.

I would refer you to Den1200’s FYBR write-up for some background on FTTH build economics. CNSL has lower FTTH build costs compared to others (FYBR and LUMN) due to their relatively dense New England footprint and prevalence of aerial fiber in their network. CNSL has 2.7m total passed HHs (1.7m of which are in New England) and plans to upgrade 70% of their footprint by 2025. They expect the average cost per home passed to be $550-600 ($400-450 in New England), which is lower than what FYBR is expecting ($900-1,000 for “Wave 2”). Similar to other FTTH build plans, CNSL is expecting 24% penetration in 2 years, 33% penetration in 3 years, 40+% penetration at maturity and $700/home of success-based capex.

CNSL received a $425m strategic investment from Searchlight Capital. Searchlight’s active involvement (2 board seats) is a positive given their extensive experience in the residential broadband industry. One of Searchlight’s founders has been a director at Charter since 2009 and Searchlight’s related investments include GCI (sold to Liberty Broadband), Liberty Latin America, and the purchase of FYBR’s Northwestern footprint in early 2020 (since renamed Ziply). The Searchlight investment enabled CNSL to push out debt maturities (none until 2027), reduce interest expense and fully fund its fiber upgrade plan.

In 2022, CNSL will have a $50m step-down in high-margin subsidy revenues, so I expect revenues to decline to approx. 5% to $1.2bn and EBITDA to be approx. $450m. Due to the rapid fiber build-out, I expect revenue and EBITDA to trough in mid-2022 as growing FTTH revenues start to offset the declining legacy DSL and voice revenues. In 2023, CNSL should return to revenue and EBITDA growth on a full year basis. From the 2022 base, I expect ~4% revenue growth so revenues reach ~$1.5bn in 2027. The components of the ~4% revenue growth: 19-20% growth in residential broadband, 1-2% growth in commercial data/transport, 14-15% declines in voice/video, and stable subsidy/other. Mgmt. is expecting EBITDA margins to approach 50% when their FTTH build is completed, but I am assuming 43% to get to 2027 EBITDA of approx. $650m.

Based on the current $7.52 share price, TEV/2022 EBITDA is 6.7x. By 2027 residential broadband should be ~50% of total revenues and commercial data/transport should be another 20-25% of total revenues. Mix shift into growing revenue streams should result in multiple expansion. Putting 8x on $650m of EBITDA, subtracting $2.2bn of net debt and using 212m diluted shares results in a $27/sh price.

Catalyst

Execution on FTTH build