The purchase thesis
Uniti Workforce (NASDAQ:UNIT) is the eighth biggest fiber supplier within the U.S. with 133,000 course miles and seven.8 million strand miles of fiber. I feel UNIT is undervalued each from an asset and cashflow viewpoint.
The belongings are treasured for two causes:
- Call for is expanding as 5G rolls out and knowledge utilization continues to upward thrust.
- Substitute price has develop into insurmountable
UNIT is valued at only a fraction of substitute price and an abnormally prime AFFO yield which provides the inventory upside from dividends, a couple of enlargement and/or a possible main asset or corporate sale.
Allow us to start at the cashflow facet of the research for the reason that asset worth is best related if the belongings can generate revenues.
Source of revenue era and enlargement outlook
Income metrics are guided as follows:
- 2022 earnings of $1.131 billion
- 2022 Adjusted EBITDA of $896 million
- 2022 AFFO of $450 million
- 2022 AFFO/proportion of $1.74
Every of those metrics is up quite from 2021.
Towards a inventory value of $9.83, $1.74 of AFFO represents an AFFO yield of 17.7%.
The common REIT has an AFFO yield of four.23%, in order a runrate, capital invested in UNIT is producing about 4X as a lot cashflow.
If UNIT had been to proceed incomes at this tempo, it will clearly be undervalued. Obviously the marketplace thinks profits are going to come back down considerably and the transparent reason why is the continuing combat with Windstream.
Contractual revenues from Windstream will proceed to extend over the duration of the time period, however ultimately the rent might be renegotiated with arbitration anticipated doubtlessly in 2027.
It’s somewhat unsure what the eventual end result might be. Uniti says the rent revenues are truthful whilst Windstream claims they want to come down considerably.
The foundation of Windstream’s argument is that the copper portion of the community has depreciated considerably and that is true, however the fiber portion of the community has develop into exceedingly treasured. Whilst Uniti owns the belongings, Windstream has spent $1.1 billion in construction out the fiber community, together with $85 million already in 2022.
Making an investment $1.1B in a single’s personal community calls for a undeniable go back on funding however making an investment $1.1B in a community that any individual else owns calls for a far upper hurdle charge.
So I do not actually purchase Windstream’s argument that the community is not vastly treasured to them. If the community was once now not producing critical earnings for Windstream there’s no manner they might make investments $1.1B in belongings that they do not even get to stay.
Having a look on the price foundation of the community and the substitute price of the community, I lean towards the present rent ranges being truthful. Alternatively, there’s no doubt that it is going to get messy and be unhealthy PR for everyone concerned. I additionally don’t deny the possible chance of a haircut someplace within the neighborhood of 30%.
That may be a great distance off and within the intervening time Uniti is rising its non-windstream revenues somewhat well.
Enlargement is coming from 2 resources:
- Hire-up of current fiber
- New-builds made extra financial through current fiber
Beginning in 2Q21, fiber leasing volumes speeded up to a tempo of about $0.9 million MRR (per month ordinary earnings) booked each and every quarter.
Since that is per month earnings, that represents $10.8 million annual earnings. 59% of this incremental earnings is lease-up, which has just about 100% margin and the opposite 41% is prime margin however now not 100%. Out of this $10.8 million in new revenues, about $9 million flows via to AFFO which divided over 267 million exceptional stocks implies about $0.033 of accretion each and every quarter or about $0.13 in step with yr.
Many of the non-wholesale bookings consisted of endeavor and e-rate. Call for from those tenants is trending up well.
As 5G rolls out, I look forward to UNIT’s leasing enlargement to handle or building up its tempo. $0.13 of incremental AFFO/proportion is somewhat just a little of enlargement for a sub $10 inventory. The usage of a ten% cap charge on new profits this is $1.30 of annual worth accretion.
So, whilst the Windstream mess will constantly loom over UNIT’s inventory value, I do wish to indicate that even in a worst-case state of affairs end result, UNIT nonetheless owns the entire fiber belongings so this enlargement via lease-up pipeline stays in-tact.
In different phrases, it is just the Windstream revenues that may doubtlessly get a haircut. The fiber industry is unrelated.
Fiber asset worth
Fiber is just a little difficult to price as there are numerous course explicit components in addition to add-ons like nodes or on-network connections.
As such, it’s tough to get a super comparability, however there are some respectable comparisons to be had which I’ve tabulated underneath.
The $14.3B acquire of Zayo through DigitalBridge (DBRG) is almost definitely the cleanest instance of a public buyout of a pure-play fiber corporate.
Zayo has 15 million strand miles and 130,000 course miles making the acquisition value equate to $953 in step with strand mile and $110,000 in step with course mile. Uniti trades at an EV of $8.439B or more or less $1081 in step with strand mile and $63,435 in step with course mile.
Thus, Uniti is considerably discounted to the Zayo transaction at the foundation of EV in step with course mile, however dear at the foundation of EV in step with strand mile.
What’s the distinction?
Zayo’s fiber is lengthy haul routes with dense city spaces, so it has giant conduits with moderate strand density of 115 fibers. It covers much less space however has extra capability within the spaces it covers.
Uniti’s fiber is a little more tier 2 town, so it does not want as many strands in each and every conduit to deal with capability. Its moderate density is 59 strands in step with conduit. Suburban/rural fiber like that owned through Uniti has a tendency to have upper earnings in step with strand mile however decrease earnings in step with course mile.
General, I’d say Uniti is priced just a little cost effectively relative to the ZAYO transaction. Each Uniti and ZAYO are priced extraordinarily cost effectively relative to substitute price.
Burying new fiber conduits these days is terribly dear and time eating. Possibly the most efficient measure of substitute price is Crown Fort’s (CCI) capital invested to put new fiber.
- In 1Q22 CCI spent $2.6B to construct 13,000 course miles
- In 2Q22 CCI spent $2.8B to construct 13,900 course miles
This is price in step with course mile of $200K and $201K, respectively.
Obviously there are variations in location which might have some affect on substitute price, however at $63K in step with course mile I feel it’s transparent that UNIT is buying and selling a ways underneath substitute price of its fiber community. It’s also buying and selling underneath the price of its personal transactions by which UNIT purchased Bluebird and TPX at $1792 in step with strand mile and $146K in step with course mile, respectively.
Further belongings now not incorporated
The above research of fiber worth is assuming the remainder of Uniti’s belongings are price $0.
Copper is out of style, however it’s nonetheless in use and producing earnings. As such, I feel there may be subject matter worth in Uniti’s 230,000 course miles of copper. Although the copper itself turns into obsoleted, the in-place conduits may scale back the price of overbuilding that community with fiber.
Abstract of purchase thesis
Uniti is a messy tale which is retaining traders away and the marketplace value low. Alternatively, the belongings are in prime call for and tough to switch which makes them treasured. I estimate UNIT is buying and selling at just below part of NAV.
Hire-up of that fiber community supplies a pathway for realization of the asset worth. At present tempo of leasing, UNIT can upload an incremental $0.13 of AFFO each and every yr which at a conservative 10X a couple of is $1.30 of worth accretion. Be aware that 10X is underneath marketplace a couple of for pure-play fiber AFFO.
This $1.30 in step with yr greater than justifies Uniti’s sub $10 marketplace value such that the inventory is undervalued even supposing the Windstream debacle ultimately ends with unhealthy information.
As we stay up for the fiber lease-up shareholders can benefit from the 5.88% dividend yield.
Catalyst: dividend will increase
Uniti’s dividend has been constrained through debt covenants, however progressed monetary status has got rid of the ones restrictions. As of these days, the payout is best 90% of taxable source of revenue and 34% of AFFO. To be able to maximize its tax advantages as a REIT, UNIT will want to carry its dividend.
Such dividend raises on already prime yield shares have a tendency to deliver larger investor pastime.