Introduction
Just over a year ago, I wrote an article on Cellnex Telecom (OTCPK:CLNXF) as the European counterpart of American Tower (AMT) and Crown Castle (CCI) was (and still is) trading at substantially lower multiples. As Cellnex is not structured as a REIT but as a normal corporation, its handicap is that it has to pay corporate taxes while the bottom line result is obviously heavily impacted by the depreciation and amortization expenses, which are a multiple of the sustaining capex to keep cell phone towers operating. I argued this was an opportunity to have a closer look at Cellnex as its debt load – which was one of the main arguments against an investment – is manageable and in line with the debt ratios of its North American peers. Fortunately Cellnex’ management also realized it had to change the perception of the company by focusing on free cash flow. Instead of reinvesting the free cash flow into building additional towers, Cellnex has now confirmed on a recent capital markets day it will focus on debt reduction and it will start to pay a dividend.
Cellnex Telecom is a Spanish company and its primary listing (ticker symbol CLNX) on the Madrid Stock Exchange for sure is the most liquid listing. The average daily volume is 1.4M shares and the current market capitalization is just under 24B EUR based on the current share count.
The era of cheap debt is over
The business model of Cellnex was/is very simple. It builds, owns and leases cell phone towers to phone companies. Very straightforward. This also means there’s a large upfront cost to actually build the towers, but once they’re up, the sustaining capex is pretty minimal.
Although the net income isn’t really the best metric to judge Cellnex on, it is an important starting point to derive the underlying free cash flow result of the company.
As you can see below, the phone tower operator reported a total revenue (which it calls “operating income”) of 4.05B EUR and as the income statement shows, the operating expenses to keep the towers up and running was just over 1.1B EUR. The depreciation and amortization expenses of 2.55B EUR actually represent close to 70% of its total amount of operating expenses. As the sustaining capex is much lower (I will discuss that later in this article), the underlying cash flow performance is much stronger than the reported operating profit of 374M EUR.
As you can see above, the total amount of financial expenses exceeded 800M EUR and this represented an increase of in excess of 10% compared to the 2022 performance. I will discuss the company’s sensitivity to the interest rates later in this article. More importantly, all these elements resulted in a pre-tax loss of 436M EUR and a net loss of 316M EUR of which 297M EUR was attributable to the shareholders of Cellnex. As there are just over 700M shares outstanding, the net loss was approximately 0.44 EUR per share, which was almost exactly the same result as in the preceding year.
A net loss certainly isn’t great to see, but let’s have a look at the cash flow performance of Cellnex as that’s what really matters. As you can see below, the total operating cash flow was approximately 2.07B EUR and approximately 2.05B EUR after deducting the changes in the working capital. Note: this includes a 181M EUR tax payment to settle deferred tax liabilities although no taxes were owed based on the income statement.
From that result, we should still deduct the 651M EUR in lease payments as well as the 2M EUR in dividend payments to non-controlling interests. This means the adjusted operating cash flow was approximately 1.4B EUR.
As you can see in the image above, Cellnex spent about 2.2B EUR on building new cell phone towers. This means the company was pretty much breaking even on the cash flow level after also taking the 631M EUR in proceeds from asset sales into consideration.
It goes without saying the vast majority of the capex consists of expansion capex. The image below clearly confirms this. As you can see, the maintenance capex was 139M EUR while there was approximately 1.4B EUR in expansion capex, including the build-to-suit (‘BTS’) capex.
This means that excluding the asset sales and assuming an adjusted operating cash flow of 1.4B EUR, the underlying free cash flow result was approximately 1.26B EUR and this includes the 181M EUR in cash taxes paid, as per the cash flow statement. Excluding that, the underlying free cash flow would have been 1.44B EUR which represents an FCF of in excess of 2 EUR per share.
Of course this is “hidden” by the high capex. And although those investments will certainly be accretive, the market was getting a bit worried about the net debt of 20.1B EUR as of the end of 2023.
Keep in mind the 20.1B EUR also includes the lease liabilities. The net financial debt excluding those lease liabilities was approximately 17.4B EUR. Including lease liabilities, the net debt vs. EBITDA ratio was getting close to 7. While that’s a normal ratio for REITs and although Cellnex is a “REIT-like” company, the market signaled it was worried about the debt pile despite Cellnex’s towers being subject to an average contract length of 31 years (including assumed renewals).
The long-term plans are encouraging
That message was well understood by Cellnex management and the company published an updated capital allocation plan for the next few years. As you can see below, the company is dubbing the current phase to be its “next chapter” wherein deleveraging and shareholder rewards will be the main priority.
The key pillars are the lower debt ratio which will be reduced to 5-6 times EBITDA within the next three years while the company will spend 3B EUR on dividends and spend 7B EUR on buybacks, special dividends and potential (smaller) M&A opportunities. Cellnex is aiming to walk down its debt ratio by 0.4-0.5 times EBITDA per year due to a combination of debt reduction and higher EBITDA results.
Assuming the 3B EUR in dividends will be spread out over five years, the average annual dividend would be 600M EUR per year (starting at “at least 500M EUR from 2026” and projecting an average annual growth rate of 7.5%), which is approximately 85 cents per share. Based on the current share price, that would represent a dividend yield of just over 2.5% (subject to the 19% Spanish dividend withholding tax). Definitely not the highest yield, but the 10B EUR in total cash generation is important as that indicates about 14 EUR per share, to be generated by the end of the decade.
The increasing free cash flow will be driven by the end of the build to suit capex program which is slowly winding down.
More importantly, Cellnex also provided near-term targets. It expects a reported free cash flow of 300M EUR and 400M EUR in 2024 and 2025, respectively, and that still includes the substantial growth investments. The Recurring Leveraged FCF (including interest payments and lease payments but excluding growth capex) will be 1.7B EUR this year, increasing to at least 2B EUR in 2025.
And that’s what matters to me. The 2025 guidance calls for almost 3 EUR per share in underlying free cash flow per share. The vast majority will still be spent on growth (and the impact is visible in the EBITDA guidance which will show a 7% increase in 2024 followed by another 6% increase in 2025), but the reported free cash flow, including growth, will increase as well.
For FY 2027, the company is guiding for a 2.2B EUR RLFCF and a reported FCF of 1.2B EUR.
The anticipated higher interest expenses should be included in the 2027 guidance but Cellnex is also quite lucky it has locked in fixed interest rates on almost 80% of its debt. The company anticipates that, based on the current market rates, it will be able to keep its average cost of debt at or below 2.6% until 2027.
The image above shows 2028 will be an important year for Cellnex as it will have to refinance about 3.7B EUR in existing debt. That’s about 20% of its total net debt position, but I’m not particularly worried. Let’s assume not a single dollar of debt will be repaid and 3.7B EUR will be refinanced in full. Let’s assume the cost of debt will increase by 250 bp. That would increase the interest expenses by 92.5M EUR which is just 4% of the RLFCF. So, yes, there would be a noticeable impact, but the impact will still be easily manageable.
And considering the company will generate hundreds of millions in free cash flow, I wouldn’t be surprised to see it use some of that cash flow to reduce the financing needs which would further reduce the impact on the free cash flow performance.
Investment thesis
While I certainly understand the market isn’t too keen on seeing a leverage ratio of close to 7 times EBITDA, but we are now at “peak debt” and the company’s reported free cash flow will increase while the EBITDA will continue to increase as well. The EV/EBITDA multiple is currently approximately 15, but if we would use the 2025 guidance of 3.45B EUR in EBITDA and assume the 2024-2025 free cash flow will reduce the net debt to 20B EUR, the EV/EBITDA ratio drops to around 12.5 and will continue to decrease (subject to Cellnex’s final capital allocation plans).
I’m more interested in seeing Cellnex reach its free cash flow guidance as that would indicate the company is trading at a free cash flow yield of approximately 9% which I think is an attractive valuation for an European leader in its segment.
I currently have no position in Cellnex Telecom, but I have written put options that are currently slightly out of the money. As the company now has a clear plan for the near-term and mid-term future, I’d like to initiate a long position within the next few months.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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