Deutsche Bank Securities analysts are doubling down on their contrarian bullish view on Uniti Group, based on an expectation that the company’s biggest shortcoming is mutating into an asset.
Uniti Group, formerly Communication Sales & Leasing (CS&L), controls Windstream's fiber and copper assets. Earlier this year, Communications Sales & Leasing bought two fiber network operators: Hunt Telecom and Southern Light. The purchases were diversification maneuvers, but the company also expects it to be synergistic, given its wireless tower network will be able to provide small cell and tower backhaul for the fiber network.
Despite increasing revenues, Windstream has posted a long string of quarterly losses, and so investors remain jaundiced about anything having to do with Windstream. Considering recent developments, Deutsche Bank disagreed, and after speaking with Uniti executives again, it disagrees more.
Deutsche Bank is heartened not only by the Hunt and Southern Light acquisitions, which will vault the company into the ranks of the top 10 fiber operators in the U.S. (the unit is on pace to represent roughly a third of Uniti’s revenue by the end of the year, and that figure should increase), but also by the prospects for Windstream.
Uniti Group CEO Kenny Gunderman and CFO Mark Wallace told Deutsche Bank analysts that they remain highly confident in Windstream's ability to sustain network lease payments, citing the "high-priority" nature of network access, Windstream’s 3x (OIBDAR) coverage of rent expense, and WIN's incremental cost synergies from recent deals.
The Uniti execs also explained that the Windstream wireline network infrastructure is vital for reaching rural customers. Expanding high-speed broadband access is likely to remain a value for potential customers, regulators, and service providers alike.
Deutsche Bank analysts are buying all of it.
They say their stance on wireline and wireless telcos remains cautious, but “we believe infrastructure-centric companies (ie: Fiber, Towers) are better positioned as beneficiaries of secular tailwinds, with less downside risk.”
Although Uniti’s fiber business is, at present, the healthier-looking side, oversupply is a general concern.
Deutsche Bank relayed Uniti’s views that the fiber market is healthier now than it has been in the past, with previous oversupply issues (mostly in long-haul) now mostly over. Uniti says its fiber networks are more dense in their respective markets and serve a diverse customer base of telcos, enterprises, school/government campuses, and backhaul/FTTx verticals, providing healthy opportunity to add tenants.
This is in contrast to the fiber networks of some peers, which face greater in-market competition in tier 1 cities, as Uniti execs told Deutsche Bank.
Deutsche Bank concludes: “We have a Buy rating on Uniti. Our bullish view is based on Uniti's position as one of the larger independent communications infrastructure providers, which should enable the company to benefit from secular tailwinds in the industry. We think Uniti shares offer a more defensive way to invest in the RLEC space, offering strong shareholder returns at an attractive valuation, with further potential upside from growth industries including fiber and towers.”