EUR 850.00 For Business Accounts Only

Morningstar | SBA Communications Continues to Benefit from Strong Tower Leasing Activity; We Plan to Raise FVE

In continuing with what has become a trend, we can't find any faults in SBA Communications' fourth quarter, the firm's strongest of 2018. We believe tower leasing has been strong across the industry, and SBA is taking advantage. Moreover, we expect the strength to continue over the medium term. Beyond 5G upgrades and new spectrum deployments that we expect will happen over the next few years, we believe simple growth in demand for wireless data will continue driving activity. We aren't making any dramatic changes to our forecast, which already assumes a strong environment, but we expect our $133 fair value estimate will rise 5%-10% after accounting for the time value of money and a materially reduced share count. The firm repurchased another 2.2 million shares in the quarter, bringing its 2018 total to over 5 million shares, or nearly 5% of the total shares outstanding. Shares will continue to look overvalued relative to our updated fair value estimate. We have penalized the company--via a higher assumed cost of equity--for its strategy to finance share repurchases with debt and remain very highly leveraged, which we see as risky. However, we admit SBA's strategy has worked beautifully in an era of easy credit, and we aren't looking for any hiccups in its business, which we believe benefits from a narrow moat.

Fourth-quarter organic site leasing revenue grew 6% year over year, the strongest level since 2015, as the firm saw high levels of both amendments and new leases. More impressive is the 8% gross organic revenue growth, as churn from defunct networks in the U.S., which SBA knew was coming, increased nonrenewals this quarter. We project a similar level of organic revenue growth in 2019. Leasing margins were also strong--up 80 basis points year over year in the quarter and 70 basis points for the full year--despite foreign exchange headwinds. We believe operating leverage will cause margins to expand another 200-300 basis points over the next five years.

Leasing activity in the U.S. remains strong, with the big four carriers accounting for 84% of new leasing, including the benefit from AT&T aggressively rolling out FirstNet (the government contract to build a wireless network for emergency responders). Management also indicated it began executing leases with Dish Network in the fourth quarter. Consequently, organic site leasing revenue in the U.S. grew more than 5%, and almost 7.5% on a gross basis. Churn from defunct networks accounted for half of the 2.3% nonrenewal rate in the quarter. We expect those networks to continue churning as contracts expire over the next two to three years. Overall, we expect the tailwinds SBA saw in the U.S. in the fourth quarter to continue throughout 2019.

On a constant-currency basis, year-over-year organic international leasing growth was 10.3% in the quarter and almost 10% for the full year. Churn ticked up a bit to 1% in the quarter, but management said it was attributable almost entirely to one non-Big Four customer in Brazil and one minor tenant in Nicaragua. Management indicated that each of the four biggest carriers were active in Brazil, which is far and away SBA's biggest international market. However, currency weakness in Brazil continues to be a drag on SBA's international performance—it was a 10% drag on international revenue growth in 2018. We expect leasing activity in the international markets to remain strong, and we think SBA will continue adding towers (counted as inorganic revenue growth), but the 10% annual organic revenue growth rate that we project annually over the next few years is currency-neutral.