Telecoms primer

– GLI101

Overview

Telecom infrastructure companies are essential to everyday communications throughout the world. Consumer demand for mobile data, particularly video, continues to grow unabated and tower companies play a central role in the eco-system that will grow in response to this. As carriers increase the capacity of their networks to meet this demand by add-ing more cell sites, or lighting up more spectrum and more efficient equipment at existing cell sites, tower companies will benefit from increased rental revenue that carries a high margin. The essential nature of these infrastructure assets, plus forward-looking growth, combine to form a compelling investment story. 

Evolution

The evolution of independent telecom infrastructure companies has facilitated the sharing of tower assets among multiple tenants. The logic – more value can be created from the efficient use of these assets. This also means that the independent tower companies have the flexibility to deploy capital expenditure to further improve efficiency and push operational excellence and standardization programs.

 

In addition, they have increased asset roll-outs, or supply, which are vital to meet increasing data consumption. In a nutshell, they have created the conditions to allow more tenants on telecom infrastructure assets, creating immense value and efficiencies. This is highlighted by one key metric for tower companies. On average, an independent telecom infrastructure company will boast a tenancy ratio of approximately 2x, com-pared against 1x for MNO-owned tower assets. 

Data

According to CISCO, the number of  connected devices will number around 30 billion by 2022, an additional 10 billion devices in just five years. While 4G was a transformational step in mobile technology, it was never designed to handle so many devices, and as a result, the user experience on 4G networks in many areas has started to degrade. Projected growth in connected devices will further exacerbate the situation.

 

Looking forward, the introduction of 5G offers significant advantages over 4G. In terms of capacity, 5G technology has the potential to connect at least one million devices per km2 compared to one hundred thousand wireless devices per km2 for 4G. 5G also boasts increased through-put speeds (1GB per second to 20GB per second), reduced latency and reduced energy requirements resulting in reduced cost. On a macro level, the applications of 5G are expected to include the following categories, among others:

  • Entertainment – lightning-fast HD

  • video downloads and streaming, plus Virtual Reality and AR;

  • Internet of Things – connection of appliances, devices and sensors in smart cities;

  • Healthcare – real-time monitoring of people’s health, remote use of medical equipment;

  • Transport – communication for self-driving vehicles, smart traffic lights and signs.

5G networks and services will be de-ployed in stages, with different carriers adopting varied strategies in large part dictated by their spectrum assets. In many areas, 5G will first be used for fixed wireless applications: residential and branch backhaul.

 

Deployment started in mid-2019 continuing through 2020, with service providers offering 5G services in select cities. Around 2021, a 5G service will be commonplace in many large cities in the USA, EMEA, Japan, and China, with important rollouts lasting through to at least 2023. 5G is also expected to be deployed outside of cities, and select carriers have already begun these deployments in the USA using low-band  spectrum on a nationwide basis. Ultimately, 5G is expected to occupy much the same footprint as 4G does today.

Dan Schlanger, CFO at Crown Castle explains, “As has been the case for well over a de-cade, the market for shared communications infrastructure in the USA remains robust. With mobile data demand growing at 30-40% per year, wireless operators are adding capacity to their networks by actively de-ploying new spectrum and densifying their 4G networks utilizing both macro sites and small cells. At the same time, the industry is in the very early stages of 5G deployments that we believe will add to the long runway of demand for shared tower and small cell infrastructure in  the USA.”

 

He continues: “By delivering dramatic network performance improvements, including a significant increase in capacity with faster data speeds and lower latency, 5G has the potential to enable new use cases that would drive even greater increases in mobile data demand. Towers, small cells and fiber will all play a critical role in delivering on the promise of 5G. We believe our unique portfolio of towers, small cells and fiber positions us take advantage of the same demand drivers, customer base and value proposition that has made the US tower industry so successful. With these positive long-term growth trends driving demand for our infrastructure, we are excited about the opportunity to deliver compelling total returns for our shareholders.”

Staying connected

Smartphones are fast becoming the ‘communications hub’ for social media, video consumption, tracking IOT/digitization applications as well as traditional voice calls. It is forecasted that they will represent 44% of global IP traffic by 2022 (up from 18% in 2017) and mobile data traffic will grow nearly twice as fast as fixed IP traffic through 2022.

 

What’s clear is the necessity of denser networks of tower infrastructure (macro sites) and small cells (micro sites) to meet increasing data consumption – whether 4G or 5G. In this example, wire-less congestion occurs when too many people try to use the same cell site at the same time. Coupled with increased data usage, all that extra demand can quickly overload a cell site’s capacity. Naturally, the best way to relieve congestion is to add new telecom infrastructure. This can be in the form of macro cell sites like towers, plus additional small cells that add more capacity in high-traffic ur-ban areas, like in a busy market or sports arena. In rural and suburban areas, as well as along roadways, operators can handle increased traffic simply by densifying existing macro site networks.

 

In the mid-term, significant 4G investments are expected to continue. The graphic below shows that in the USA, 4G densification and investment will be needed to support data growth despite the introduction of 5G. In fact, 4G is expected to maintain a 50% market share through 2025.  

 

While 5G is grabbing most of the head-lines, there are regions in the world where 3G and 4G networks are just now being deployed. The secular drivers of wireless data demand in developing economies are following a similar path that was created in more advanced economies over the past ten years.

 

The chance to participate in this long runway of growth is one of the factors that attracted SBA Communications and other tower companies to the Latin American tower market. CISCO estimate that Middle East and Africa will have the strongest mobile data growth of any region from 2017 to 2022, with 56% CAGR followed by Asia Pacific (49%) and LATAM (43%).

 

"After the tremendous success we’ve experienced in the USA due to the significant growth in mobile wireless data consumption and the transition from 2G to 3G to 4G, we saw the same opportunity profile developing in Central and South America,” comments Brendan Cavanagh, Chief Financial Officer of SBA. “Our markets throughout Latin America are quickly following the development cycles we’ve seen in the USA, and we expect them to be material drivers of growth for our company and industry for years  to come.”  

Europe

Independently owned towers still only account for approximately 20% of the European total according to EY. Looking for-ward, it is envisaged that the percentage of independent tower companies will grow both in the listed and unlisted markets along similar lines as we’ve seen in the USA over the past 15-20 years. That shift is already happening.

 

Spain’s Cellnex acquired Arqiva’s telecom division for approximately £2bn in Q4 2019 adding 7,400 owned sites in the UK. It also acquired marketing rights in a further 900 UK sites to broaden its European footprint to over 35,000 towers. Last year also saw INWIT announce a partnership with Vodafone in Italy to further broaden its domestic dominance. INWIT owns over 22,000 in Italy. Vodafone is also thought to be gearing up for an H1 2020 IPO of its newly created towerco business which manages over 61,000 sites across Europe. Vodafone ‘Towerco’ announced their new CEO will take up the reins in April 2020. Deutsche Telekom’s CEO, Tim Hottges, hinted that the mobile network opera-tor may consider a flotation of its towerco unit, Deutsche Funkturm. The towers business consists of 28,000 towers in Germany alone, according to S&P Market Intelligence.

Europe

Independently owned towers still only ac-count for approximately 20% of the European total according to EY. Looking for-ward, it is envisaged that the percentage of independent tower companies will grow both in the listed and unlisted markets along similar lines as we’ve seen in the USA over the past 15-20 years. That shift is already happening. Spain’s Cellnex acquired Arqiva’s telecom division for approximately £2bn in Q4 2019 adding 7,400 owned sites in the UK. It also acquired marketing rights in a further 900 UK sites to broaden its European footprint to over 35,000 towers.

 

Last year also saw INWIT announce a partnership with Vodafone in Italy to further broaden its domestic dominance. INWIT owns over 22,000 in Italy. Vodafone is also thought to be gearing up for an H1 2020 IPO of its newly created towerco business which manages over 61,000 sites across Europe. Vodafone ‘Towerco’ announced their new CEO will take up the reins in April 2020. Deutsche Telekom’s CEO, Tim Hott-ges, hinted that the mobile network opera-tor may consider a flotation of its towerco unit, Deutsche Funkturm. The towers business consists of 28,000 towers in Germany alone, according to S&P Market Intelligence.

Investment case

The listed telecom infrastructure companies offer investors exposure to this communications infrastructure evolution. Typically, mobile operators pay the tower companies rents under long-term, usually non-cancelable, contracts with annual escalators. Owning the infrastructure which underpins our increasingly connected lives has become an ever more attractive investment for private and public investors keen to put capital to work in infrastructure-based assets with consistently compounding cash flows.

Jim Wright, Portfolio Manager at Premier Miton, indicates the importance of the sector in his infrastructure strategy. “We believe communications infrastructure, including 
telecom towers and fiber networks, play a primary role in a diversified global infrastructure strategy. Storing, processing, translating and transmitting data, all provided by communications infrastructure, have developed into an essential part of the global economy.

 

Moreover, this will become even more vital going forward as future technologies emerge and the listed communications companies are ideally placed to take advantage of future investments.” When building a diversified allocation to the sector, investors will also look for a proven track record in terms of management expertise, quality of infrastructure assets and total return performance. The access to the size, expertise, diversification and global network exposure offered by the listed telecom infrastructure companies is unparalleled.

 

In simple terms, it would take decades and $100s of billions to replicate the networks of sites that they currently offer investors. Transparency, liquidity, attractive yield and cost efficiency all bolster the case. The long-term track record of the large US-based tower companies has been more than impressive. Even 12.5-year annualized total returns of the large caps, which include the time periods around the global financial crisis, range between 13-17% pa. In Europe, the short-term three-year annualized returns of Cellnex and INWIT are equally staggering: 48% and 30% respectively.

Moreover, underpinning the growth of share prices are the underlying performance metrics of Adjusted EBITDA and Adjusted Funds from Operations (AFFO) per share. Igor Khislavsky, head of Investor Relations at American Tower, notes that the telecom infrastructure model is optimally suited to generate consistent, recurring, long-term growth in cash flow, paired with increasing mar-gins. Khislavsky estimated that, “80-90% or more of every dollar of organic revenue growth on towers typically flows through to the Adjusted EBITDA and AFFO per share lines, given the minimal incremental in-vestment and operating expenses  associated with increased capacity utilization of tower assets.

 

“Telecom infrastructure companies can further augment this growth by acquiring and constructing younger, less mature assets that have the potential to grow for a longer period of time, at potentially faster rates,” he said. Importantly, given the critical nature of these assets for to-day’s modern networks, these types of growth rates have been achieved in a variety of capital market and macroeconomic  environments. 

Pure play

Telecom Infrastructure is not only a fundamental part of any global infrastructure allocation, it is also the backbone of how we communicate with the rest of the world. It offers exposure to essential economic infrastructure assets and services, and it leverages the exponential secular growth in global wireless usage as a key driver of demand. 

The performance of listed telecom infrastructure, as the vehicle to get exposure to the sector, has provided sustainable, long-term growth fundamentals that have subsequently generated impressive total shareholder re-turns for an extended period of time. 

The growth prospects for telecom infrastructure companies continue to look excellent as more devices get connected, more data is consumed and mobile continues to grow its market share.  

Future growth
Regulation
Technology

© 2020 The Global Listed Infrastructure Organisation

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