Telesat – Part 1: Valuing the GEO Melt

EXECUTIVE SUMMARY

• We initiate our coverage on SBAC with a Market perform recommendation and believe the best entry point would be waiting for a new issue later this year. SBAC has been a well-known HY issuer for many years and investors have grown comfortable with the credit’s defensive characteristics, including predictable cash flow streams and robust private and public enterprise valuations in the cell tower space. This is appropriately reflected in the relatively tight yield of the bonds, currently trading at a YTW of 6.1% (2027s / Duration: 4.1) and 6.5% (2029s / Duration: 5.8), compared to peers and the BB index (6.9% / Duration: 4.6). Likewise, IG tower bonds also tend to trade tight relative to their rating. We think the better entry point on the credit would be to wait for a potential new issue in the coming months, as management has signaled its intent to fund the $795 mn GTS acquisition with new debt. We would expect a new issue to price in the high-6% area based on recent NICs.
• SBAC should benefit from 5G tailwinds and a strong competitive position in rural and suburban U.S. markets. SBAC is the third largest tower company in the U.S. (behind AMT and CCI), where it generates 77% of its consolidated site leasing revenue and owns/operates 17.4k cell sites. SBAC and its peers are seeing tailwinds from new 5G infrastructure deployment by the three most established carriers, as well as new spending from DISH, the emerging fourth player. Furthermore, we find consolidation among the 3 largest U.S. tower players unlikely given large scale and high number of domestic cell sites owned by each operator, and thus expect SBAC to remain independent.
• SBAC has moved outside the U.S. in recent years to diversify and capture upside in emerging market telecom infrastructure investment. SBAC began investing more heavily in international markets 10 years ago and the segment now makes up 24% of site leasing revenue as of 2Q (approximately half from Brazil). These markets are in earlier stages of mobile infrastructure deployment. International same tower organic revenue growth rates are outpacing the U.S., most recently by 1.5% in 2Q22, and contracts here are hedged against inflation risk. The EM strategy does present different elements of risk (e.g., geopolitical, FX, consolidation) and we expect SBAC to continue to grow its international portfolio through M&A, as shown by its recent $795mn acquisition of GTS towers in Brazil in 2020 (10x multiple).
• We expect shareholder returns to remain elevated, but within the confines of its 7.0x-7.5x leverage target range. SBAC had an aggressive shareholder returns in recent years, having bought back $583 billion of stock in 2021 and $432 billion in YTD 2022, on top of its required REIT distribution (90%+ of taxable income). Management has $505 million left in its buyback program and says it will continue to be opportunistic. However, we would not expect SBA to move outside of its 7.0x-7.5x leverage target range. We expect that a greater portion of shareholder returns will shift from buybacks to dividends, as SBAC is targeting 20% of annual dividend growth.
• We see low probability of a ratings upgrade (Ba3/BB/NR with stable outlooks). The rating agencies are clearly comfortable with SBAC’s high leverage point (7x-7.5x target range) relative to other BB-rated peers due to the strong tower industry dynamics and predictable capital allocation policy. However, we see a low probability for an upgrade unless SBAC were to reduce its leverage target range to being more in line with its IGrated tower peers AMT (6.1x) and CCI (5.1x). SBAC has enjoyed a low cost of capital even as a BB-rated issuer and thus, we believe such a capital allocation shift is unlikely.