EUR 850.00 For Business Accounts Only

Morningstar | It's Not for Proverbial Widows and Orphans, but We Like Uniti; Initiating With $23 FVE

Due to its dependence on Windstream, a firm we see as being in a precarious financial position, there is very high risk to Uniti's performance. However, we like its business, and as long as it can avoid the worst-case scenarios regarding its Windstream relationship, we think the stock is attractive. We are initiating coverage with no-moat and stable trend ratings and a fair value estimate of $23 per share, which implies an EV/EBITDA multiple of 10 and a P/AFFO multiple of 8 based on our 2019 forecast.

As we see it, Uniti was in a weak position when it was spun off from Windstream in 2015. One hundred percent of its assets were reserved exclusively for Windstream's use, and Windstream was its sole customer. We think management has done an excellent job diversifying and entering promising businesses, but more than half of its revenue and almost 90% of its EBITDA still come from Windstream.

Diversification has come primarily via acquisitions and fiber network construction, which spawned the firm's fiber infrastructure segment, where Uniti leases dark and lit fiber and small cells to wireless carriers and other enterprises. While we generally are skeptical about the economics of such businesses, we see Uniti as better positioned than many competitors because it focuses on second- and third-tier cities, where we don't think competition is quite as intense. For example, Crown Castle explicitly proclaims its footprint covers only the largest U.S. cities. In addition, the major cable providers in the U.S. are absent over much of Uniti's footprint. We expect fiber use to continue growing substantially given constantly increasing data consumption across wired and wireless networks, and we think Uniti is well positioned to capitalize in its niche.

We also like Uniti's leasing business, where it has engaged in sale-leaseback transactions to buy other companies' fiber and immediately lease it back at attractive rates, but we are unconvinced Leasing can materially grow profitably beyond Windstream. We don't think Uniti adds much value beyond providing capital, so we expect virtually any firm with access to cheap financing can compete for these deals. As such, we think suitors will compete on price, and finding sizable deals at attractive rates will be increasingly difficult. Provided Uniti can access the required capital, we expect Uniti to engage in further transactions nonetheless, as it will enhance customer diversity, which we see as necessary and therefore worthwhile.

Uniti has also entered the macro tower business, primarily in Mexico and the U.S. Based on revenue, the segment is less than one tenth the size of fiber infrastructure, and we don't expect it to be a meaningful contributor in the future. Management doesn't expect to compete with the big incumbents, so we don't think it will find a sizable market opportunity here.