Uniti Group Limited

Company Overview: Uniti Group Limited was listed on 13^th February 2019, operated in telecommunications sector. It works through three segments: Wholesale & Infrastructure (W&I), Communications Platform-as-a-Service (CPaaS), and Consumer & Business Enablement (CBE).

UWL Details

1HFY22 Key Highlights: The company is moving towards an optimistic future with resilient 1HFY22 performance:

• The company is a good combination of Core Fibre infrastructure and Infrastructure as a service, where the contracts in construction premises came out as ~292,174 for 1HFY22, out of which ~163k is expected to be delivered in the next five years.
• Operational Expenditure & Margins: The operating expenses rose by ~54% from 2HFY21 to 1HFY22 and stood at ~$38.97 million. Blended gross margin increased from ~77% to ~80% on pcp basis.
• NPAT (Underlying): Even with the increasing operating expenses, the company increased its NPAT (u) by ~137% on pcp basis and reported as ~$58.42 million in 1HFY22 and EPS increased by ~86% on pcp basis.

Revenue Analysis-

Underlying EBITDA Analysis:

Top 10 Shareholders: The top 10 shareholders together form around 19.61% of the total shareholding, while the top 2 constitute the maximum holding. Cornish Group Investments Pty. Ltd.  and Norges Bank Investment Management (NBIM) are holding a maximum stake in the company at ~3.41% and ~3.15%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics: 

• Cash Position: Even after funding all CAPEX (~37% of EBITDA(u)), UWL was able to bring ~56% of Underlying EBITDA as Free Cash Flow (FCF) and reported at ~$39.5 million in 1HFY22 as compared to ~68% of Underlying EBITDA at ~$44.1 million in 2HFY21. The company closed its half-yearly 2022 accounts ending 31^st December 2021 at ~$50.9 million versus ~$57.3 million at the end of 30^th June 2021.
• Debt Profile: The company has reduced its Net Debt by ~$36.5 million from ~$208.3 million in 2HFY21 to ~$171.8 million in 1HFY22.

Liquidity Profile & Debt Profile (Source: Analysis by Kalkine Group)

Key Risks: The company is exposed to the following risk factors:

1. Technology Risk: The Telco business is quite dependent on the technology it applies, and hence, failure of regular upgradation and improvement might affect the shift in the usage and customer retention.
2. Acquisition Risk: The company’s is positive in additional growth through in-organically too, where non-impactful and non-efficient mergers might cause risks and declinations.
3. Competitive Edge: Due to the changes in customers’ preferences and sentiments and multiple market players, UWL has a constant challenge to gain a competitive edge through its operations and strategies.
4. COVID-19 and Omicron Variant Risks: Due to COVID-19 and the new variant, the company might get affected by the lockdown regulations and restrictions, which might affect its sales and operations.

Outlook: 

UWL is on track with consensus of ~$145 million of EBITDA (u) for FY22. It is hopeful that with the reduction of COVID-19 restrictions and the expectation of a decent property market, changes in lifestyle, increasing demands for speed and development of smart cities, the demands of FTTP are rising. This helps to grow its top-line in the future. The company plans to reduce its debt level, and with a belief in incorporating surplus cash generation, UWL plans for a Share Buy-Back, as it was unable to do till now in CY22 due to restricted trading period. Soft launch of Velocity is scheduled for July 2022, and it is positive that no taxes will be imposed in FY22, as cash flows will benefit from utilization of tax losses.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: As per ASX, the stock of UWL is trading near its 52-weeks’ average levels of $1.880-$4.690. The stock gave a positive return of ~13.04% in the past nine months and a negative return of ~15.92% in the past three months. The stock has been valued using EV/EBITDA multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company might trade at some discount to its peers’ average multiple, higher debt levels, reduction in ROE, expected synergies, and headwinds related to telco sector. For the purpose of valuation, few peers like Chorus Ltd (ASX: CNU), Macquarie Telecom Group Ltd (ASX: MAQ), Tuas Ltd (ASX: TUA) and others have been considered. Considering the expected Opticom contributing recurring revenue ~58% of total revenue in 1HFY20, the upside potential in valuation, current trading levels, UWL’s greenfield and brownfield investment, optimistic long-term outlook with decent EBITDA expectations, and the key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $3.240, 02:30 PM (GMT+10), Sydney, Eastern Australia, (as on 22^nd February 2022).

UWL Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Disclaimer

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