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Is Growth Now Factored In For Uniti Group?

Small Caps | Sep 09 2021

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Growth has been stellar for telecommunications specialist Uniti Group and there is more to come as households upgrade and add broadband connections

-Connection rates hold up despite growth in already-connected premises
-Main risk is impact of lockdowns on construction/connections
-Uniti Group now eyeing potential capital management


By Eva Brocklehurst

Telecommunications service specialist Uniti Group ((UWL)) has been rapidly growing its fibre connections to premises, expanding wholesale recurring revenue as more households choose higher speeds.

Uniti Group has expanded its contracted pipeline to 250,000 premises, the equivalent of 7-10 years of work. Agreed, this is subject to housing conditions, yet if the second half is anything to go by there is a new dynamic occurring, Ord Minnett asserts.

Around 70% or more of households now have broadband plans of 50 mbps or greater, supporting the monthly wholesale revenue paid to the company.

Ord Minnett believes the current level of activations can be sustained for FY22, given momentum in dwelling approvals and an increasing skew to higher quality developers. Macquarie also emphasises strategic partnerships with large developers and suggests the cash flow is supporting de-gearing and flexibility and connections have momentum.

The active connection rate was held at 60.7% in FY21, despite 8% growth in connected premises and margin improvement was also obtained in the core network platform.

Lockdown Slowdown?

Bell Potter allows for some slowdown in construction in forecasts on the back of the current lockdowns in both NSW and Victoria. The main risk, Jarden agrees, is the lockdown impacts of the timing of construction and connections.

Connections were ahead of Goldman Sachs' expectations in FY21 and, importantly, skewed towards higher-returning detached premises. Strong margins and cash flow also featured.

A highlight was the 64,000 premises added to the contract book, which Jarden estimates was 28-60% ahead of market expectations. This should add to the longer-term growth profile.

A cash tax benefit also featured, which will be realised in FY22 because of accelerated depreciation of the assets acquired. As a result the broker upgrades earnings forecasts by 17% for FY22 and 15% for FY23.

While no guidance was provided at the results, the company did indicate the underlying exit run rate for operating earnings (EBITDA) was $133.4m and that current and future franking credits should enable fully franked dividends in future, or a share buyback.

Rating Downgrades

Ord Minnett, with a Hold rating, raises the target to $4.21 from $2.90 and is increasingly interested in the options in adjacent verticals including commercial and enterprise markets. Cash flow is plentiful and the balance sheet is deleveraging quickly so the broker suspects dividends or capital management could be on the cards within the next 6-12 months.

Bell Potter forecasts the commencement of dividends in FY23 and the net result of its updates is a 25% increase in its target to $4.50, yet as this is at a premium of around 15% to the share price, downgrades the rating to Hold from Buy.

Macquarie also homes in on the prospect for capital distribution, expecting either fully franked dividends or future share buybacks, and downgrades to Neutral from Outperform with a target of $4.13, believing the share price is reflecting the outlook for growth.

Post FY21 results, Goldman Sachs has upgraded estimates for FY22-24 and raised its target to $4.40, also downgrading to Neutral from Buy.

The broker notes, since adding the stock to its "buy list" in April, the shares have risen 77% based on the attractive earnings profile and infrastructure characteristics, which are now more fully reflected in the share price.

Goldman Sachs remains positive on recurring revenue but prefers to obtain exposure to the broader sector through data centre operator NextDC ((NXT)), given it has a large addressable market and better growth-adjusted multiples.

Jarden, on the other hand, believes investors should stay the course with Uniti Group as it is taking greater market share against competitors and this is translating into longer-term growth options.

Jarden is forecasting a four-year earnings growth rate of 17% with risk to the upside. Nevertheless, given the move to the share price, the broker ratchets down its rating to Overweight from Buy while revising its target to $4.60 from $3.89.

See also, Treasure Chest: Above Sector Growth For Uniti Group on June 8, 2021.

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