Cellnex Earnings: New CEO Understands the Tower Business Model and Changes the Narrative

The main highlight of Cellnex’s CLNX second-quarter earnings is the new narrative by CEO Marco Patuano after only 60 days in charge. For a long time we’ve talked about Cellnex’s opportunity to make its tower portfolio more efficient (tenancy ratio of 1.37 times compared with Inwit at 2.2 and Vantage Towers at 1.46), but we’re still waiting for this opportunity to materialize. Acquisitions aside, in recent years Cellnex put more focus on deploying new towers (build-to-suit towers) for mobile operators rather than co-locating them in existing ones. Newly deployed BTS towers, which normally come at a tenancy ratio of 1 times, generate returns that match Cellnex’s cost of capital, but don’t expand it. The beauty of the tower model is to co-locate new tenants in existing towers as revenue increases significantly while costs hardly go up, expanding profit margins substantially. We noticed a shift in its narrative to co-location in the July 27 earnings call, which is “free” growth for Cellnex (little investment needed). We maintain our EUR 52 fair value estimate with shares up 5% on July 28 and trading at EUR 38.

Patuano emphasized the need to improve the use of Cellnex’s existing invested capital (towers already in use) rather than to keep expanding (investing in new towers). Deploying new towers brings growth, but is a capital-expenditure-heavy activity, while co-locating tenants in existing towers brings growth, but is capital-expenditure-light. According to Patuano, some mobile operators believe it is faster to build a new tower than to co-locate in an existing one and he also talked about the need to educate clients and show them this is not true. Putting words into action, Cellnex has already struck a deal with SFR in France, which we estimate will grow its French tenancy ratio from 1.17 times to 1.20 times. Although this is not a huge increase, Cellnex talked about the need to find similar deals in other countries and we’re pleased with the change in narrative.