EUR 850.00 For Business Accounts Only

Morningstar | Foreign Exchange Headwinds Damp Solid 2Q Performance and 2018 Outlook for SBA; Maintain $133 FVE

Narrow-moat SBA Communications continues to post impressive organic tower revenue growth, exceeding 5% for the third straight quarter (5.4% in second quarter) and outpacing the 4.8% we were expecting for the year. However, significant weakness in the Brazilian real contributed to total revenue--which grew 6.8% in the quarter--falling a bit shy of consensus estimates and tracking below the nearly 8% growth we projected in 2018. Management expects currency headwinds to persist through the remainder of the year and slightly lowered guidance as a result, as the exchange rates it now assumes will more than offset a better operating outlook. Perhaps more concerning for the market, management wavered on its target of reaching $10 in adjusted funds from operations, or AFFO, per share by 2020, saying that if exchange rates and interest rates stayed at today's levels, it would be unlikely to reach that goal. We had already assumed a rising interest rate environment and consider 2020 AFFO talk to be mostly noise. Nonetheless, despite excellent operating results that we project going forward, we still see shares as overvalued. With foreign exchange rates offsetting the time value of money in our model, we are maintaining our $133 fair value estimate.

Strength both domestically and internationally reinforces the positive business environment we expect in the years to come. Management indicated that it saw strong activity from all four major wireless carriers in both the U.S. and Brazil (which collectively account for the bulk of SBA's business), increased its backlog, and is starting to see 5G-related activity. It also posted its highest margin numbers of at least the last decade, with an adjusted EBITDA margin of 70.7% and segments' operating margin of nearly 75% (ahead of our full-year forecasts of 70.5% and 74.5%, respectively). We expect margin expansion to continue, with both EBITDA and segments' operating margin rising by 200-300 basis points by 2022.

In the U.S., organic revenue growth was 4.7%, and the firm acquired 220 new towers in the quarter, which is a much bigger domestic purchase than it has made in recent years. Going forward, we expect SBA to add about 160 towers per year through acquisitions and new-builds and to average 5%-6% organic revenue growth. We think the spending environment among U.S. carriers will remain robust as carriers need to keep up with growing data demand by continually densifying their networks, and we expect them to begin a more widespread upgrade to 5G within the next couple of years. However, we are not yet modeling the Sprint-T-Mobile merger, as we don't think regulatory approval is a foregone conclusion. Completion of the merger would curtail our revenue assumptions some. U.S. operating margin of 80.5% this quarter is in line with our 2018 forecast. We expect operating leverage to enable U.S. margins increasing by about 200 basis points by 2022.

Internationally, total cash revenue growth was 10% in the quarter, consisting of about 9% organic revenue growth and 9% growth due to acquisitions and new builds, offset by currency exchange rates. We expect a similar environment going forward, as sizable tower acquisitions are a regular component of the segment's growth. After the second-quarter-ended, SBA completed its acquisition of 451 towers from Millicom in El Salvador, and it has another 360 under contract from that acquisition. We expect SBA to add close to 1,000 international towers annually through 2022 via acquisition and new builds, resulting in annual revenue growth of more than 15% per year. Like domestic margins, international operating margin stayed at peak levels--almost 69% in the quarter, pacing about 50 basis points ahead of our full-year projection. We expect international margins to expand by about 500 basis points by 2022.