Cellnex telecom : Upcoming "rising star"?

We have a Positive opinion on the issuer. Cellnex has solid fundamentals with prospects for 3-4% annual organic growth, high profitability and strong and recurring free cash flow generation, while long1eterm contracts and a healthy backlog that provides strong visibility. The group is pursuing an aggressive acquisitions policy with a view to consolidating its leading position in the mobile infrastructure market in Europe. This resulted in higher net debt and deteriorating credit metrics in recent years but also further enhanced the company's operating profile. The company could also pay down its debt quickly if it halted M&A activity. - We have assigned a Buy recommendation on the senior unsecured notes. Since we initiated coverage on the issuer in June 2016, the CLNX 3.125% 2022 bonds have tightened by 120bp vs. only 40bp for the JPM 'BB' index. Since their issuance in August 2016 and January 2017, the CLNX 2.375% 01/2024 and CLNX 2.875% 04/2025 bonds have also outperformed the benchmark index by 6bp and 23bp, respectively. The notes are currently trading tighter compared to our Ba1/BB+ peer group average and in line with our split rated peer group, leaving little potential in the short term. Ultimately, we believe that Cellnex's rating could reach investment grade territory (at S&P) over the next 12 months and bond spreads could tighten further by 50bp to 100bp depending on their maturities. - >Support factors - - Leading independent tower operator in Europe where barriers to entry are high given the company’s difficult-to-replicate asset base.- Strong sales visibility thanks to long-term contracts, a sizeable backlog and high margins in line with European peers. - Decent organic growth prospects (3% to 4% per year) and margin improvement potential driven by the company’s multi-tenancy and tower rationalization strategy.- Strong and recurring FCF generation thanks to high profitability and low WCR and capex. - Opportunities for external growth with mobile network operators outsourcing their tower operations.Points to watch - - High customer concentration risk in both Broadcasting Infrastructure and Telecom Infrastructure Services where Cellnex is particularly exposed to Wind Telecommunicazioni (B2/BB-), with whom it generates ~20% of its revenues. - Risk of re-allocation of spectrum used for DTT services to mobile telecommunication (digital dividend). - Market consolidation and network sharing agreements could put a strain on the company’s future revenues.- Aggressive external growth strategy that is weighing on credit ratios.