Uniti Group has a large pipeline of work ahead but is falling behind in its target to double active premises over the next five years, even though current growth is quite vigorous.
Underlying 1H22 EBITDA for UWL was $70.5 million and normalised net profit reached $40.9 million.
UWL connected 10k new premises in 1H22 but this was less than the 16k connected in 2H21. Active premises increased by 10.6k (similar to 2H21). The main point of concern was that UWL did not reach the 64k target of new secured premises that the company said it was on track to achieve as recently as November. The 51K added was still a strong number, however.
In total, UWL now has 552k secured premises of which 260k are ‘ready to connect’ and 292k are under construction as at 31 December 2021. The company has a total of 227k connections with 63% of those (142k) classed as ‘active’. So, there is a strong pipeline of existing work and the potential for new growth as the market continues to grow. The company mantra is ‘win business, build network, fill network’.
The attractive part of the business model is that over 90% of revenue is recurring with high profit margins.
UWL announced it will commence the share buyback after this result release, so we now do not forecast a dividend. Assuming $30 million of shares is repurchased in FY22f (about 1.3% of total shares) and say $50 million pa in FY23/24f, that would be equivalent to a dividend payout of 50% in FY23/24f. Net debt would likely remain around $170 million over the next few years.
Investment view
UWL is being priced more like an infrastructure business and could be an acquisition target for private infrastructure investors.
The company said it expects to meet consensus FY22f EBITDA of $145 million although this was a modest ‘downgrade’ given it had previously indicated a beat.
The slowing rate of connection activity is partially explained by lockdown construction bans, but there is enough to suggest some caution is warranted, acknowledging the company has ambitious targets.
We also have an eye on the development of the home wireless alternative for broadband connection.
Risks to investment view
UWL could face competition from home wireless services as this alternative service grows. Earnings could be affected if the connection rate of growth slowed or if customers did not activate connections.
Recommendation
We have retained our Hold recommendation.
