Stock story: Cellnex Telecom

A Spanish telco gaining from the soaring demand for mobile.

Stock story: Cellnex Telecom

Cellnex Telecom is the largest independent operator of wireless telecommunications infrastructure in  Europe, providing space on its towers to carriers across some 84,4041 sites across numerous markets in the UK and elsewhere in Europe, including Italy, France, Spain, Poland. This business represents most of Cellnex’s revenue and is the key economic growth driver of the business.

The investment case for Spain-based Cellnex reflects three attractive attributes. The first of these is that Cellnex has highly predictable and reliable cash flows. Cellnex’s key customers are mobile network operators or carriers that have long-term contracts with Cellnex, which (in simple terms) provides space on its vertical masthead and rooftop tower portfolio to these carriers. The contracts that Cellnex enter are typically for 10 to 20 years and often come with ‘all or nothing’ renewal clauses. These clauses significantly raise switching costs and mean that the mobile carriers are highly likely to renew, given the need to retain network coverage for their customers. Prices received under these contracts are typically set to grow at either inflation with a zero per cent floor or a fixed growth rate, providing a high degree of predictability and visibility of the cash flows investors can expect to receive.

The second attractive attribute for investors of Cellnex is that the company is benefitting from rising demand for wireless services, which means more demand for the towers it provides. The sites are critical for the networks of mobile carriers and have low technology risk because the risk of active equipment (such as 4G or 5G) sits with the carriers and Cellnex is focused on the more ‘passive’ physical sites. Due to the rising demand for wireless data, over time we expect the mobile network operators to invest in new capacity. Importantly for Cellnex, the main way in which carriers can increase network capacity is by installing more active equipment on additional or existing sites. Cellnex can benefit from this through increases to its ‘tenancy’ ratio whereby it can increase the number of tenants that have installed equipment per tower. Given the relatively fixed cost base, this provides an opportunity for Cellnex, which can improve its return on investment of these assets for minimal outlay.

The third attribute is that mobile carriers are outsourcing more infrastructure in Europe. Cellnex was a subsidiary of Spanish infrastructure company Abertis until 2015 when it was listed in Spain through an initial public offer. Cellnex has astutely positioned itself as an independent tower operator. In the US, this strategy is more common, with most wireless mobile sites controlled by these independent tower operators. However, in Europe, the independent tower operator role is less well established. This has allowed Cellnex to grow its asset base significantly through ongoing transactions with mobile carriers that are looking to monetise these valuable tower assets. This is a particularly valuable proposition for the carriers when needing to fund significant 5G roll-out costs. This strategy has allowed the company to grow its asset base from about 15,000 sites at the time of the IPO.

As an example, Cellnex recently entered a major deal with CK Hutchison, which is transformational in terms of the scale that it affords the company. This deal still needs to gain all the relevant approvals but it is to include 24,600 sites, with a further 5,250 sites already scheduled to be added. After completion of the rollout, Cellnex estimates that it will have 103,000 towers in its portfolio. The transaction goes a significant way to further extend its lead as the largest independent wireless communications infrastructure business in Europe.

When we look to the investment outlook for Cellnex, we believe that it is likely to continue to benefit from the same factors we have outlined above, which should see its reliable cash flow generation from existing assets being supported by underlying industry growth and carrier outsourcing trends.


1 Including announced, but not yet completed transactions

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