SBA Communications Corporation (SBAC) is one of the leading independent owners and operators of wireless communications infrastructure, primarily including tower structures that host antennas utilized for wireless communications.
The company possesses 36,017 towers which it leases to a broad range of wireless telecom providers. The company also owns a site development business, via which it supports telecom providers in expanding and sustaining their own wireless service networks.
I am neutral on the stock.
A Resilient Business
SBA Communications features a number of competitive advantages along with the handful of other tower REITs which have instituted an oligopoly in the industry. For once, with only a few players on the market and a very capital-intensive business model, it has become very expensive to penetrate into the industry.
Further, unlike conventional real estate properties, whose tenants may struggle to pay rent during a challenging economic period, telecom companies face almost no such risk. In fact, they enjoy incredibly resilient cash flows due to the essential and mission-critical nature of telecommunications, which in turn essentially guarantees no impact on SBA Communications’ performance during economic downturns. On top of that, telecommunication majors feature transparent financials and robust creditworthiness.
Thus, the company faces minimal counterparty risks as well. These traits were proven both during the Great Financial Crisis and the COVID-19 pandemic when the top and bottom lines kept on rising despite the underlying challenges in each of these periods.
SBA Communications’ latest results once again demonstrated the company’s ability to grow in a turbulent environment, with revenues reaching a new quarterly record of $619.77 million, 12.9% higher year-over-year. Higher revenues were driven by a more extensive portfolio of towers and more elevated leasing activity.
The company continued to expand its property portfolio throughout the quarter as well, by acquiring 1,807 communication sites for a total cash consideration of $215.4 million. It also constructed 86 new towers on its own.
Benefiting from economies of scale following its portfolio’s expansion, adjusted funds from operations (AFFO) rose more than revenues, by 13.3% year-over-year to $324.3 million. AFFO rose 14.7% on a per-share basis to $2.96, further boosted by stock repurchases. Specifically, roughly $431.6 million worth of stock was bought back during the quarter.
Treading further through fiscal 2022, SBA Communications’ prospects remain vigorous, supported by incremental development initiatives. Specifically, following the quarter-end, the company purchased or is under contract to purchase roughly 358 communication sites for an aggregate consideration of around $177.1 million, indicating that its expansion pipeline is being well sustained.
As a result of great operating momentum, management raised its full-year outlook, now estimating site leasing revenues to land between $2.27 and $2.29 billion and AFFO/share to be between $11.72 and $12.09 (previously $11.48 and $11.85).
Dividends & Valuation
SBA Communications declared its first dividend in 2019. Since then, the company has been rapidly growing its payouts, with its earnings providing plenty of room to do so. The latest hike was by 22.4% to a quarterly rate of $0.71.
Based on its current financials and growth momentum, the company can easily afford to continue growing the dividend by an average rate of close to 20% in the medium term. That is, assuming it gradually pays out a larger piece of its bottom line to shareholders. To put things into perspective, even following its latest substantial dividend hike, the stock’s payout ratio stands at 23.8% based on the midpoint of management’s AFFO/share estimation of $11.90.
Further, assuming an AFFO/share of $11.90 for the year, shares are trading at a P/AFFO of 27.8 at current price levels. On the one hand, the company features a number of qualities, such as recession-proof cash flows and predictable growth prospects.
On the other hand, I find this multiple modestly rich, even if the company were to record double-digit AFFO/share in the coming years. This is because investors’ returns could be affected by a future valuation multiple compression from such a rich multiple. Especially during a rising-rates environment. Simultaneously, at just 0.84%, the yield wouldn’t be enough to compensate against such multiple compression.
Thus, I wouldn’t value the stock higher than a P/AFFO of 24 based on its overall investment case. At that level, the margin of safety appears to be more reasonable.
Wall Street’s Take
Turning to Wall Street, SBA Communications has a Moderate Buy consensus rating based on ten Buys, three Holds, and one Sell assigned in the past three months. At $384.93, the average SBA Communications price target implies 16.26% upside potential.
SBA Communications has retained strong momentum when it comes to its business expansion plan, resulting in rising revenues and even quicker growth in profitability amid economies of scale.
In my view, the company will continue to grow its AFFO/share and (particularly) its dividend per share rather swiftly. Combined with its numerous qualities and strong moat, however, this has resulted in investors attaching a premium valuation to the stock. Further, while dividends have been growing rapidly, they remain a token to shareholders’ total return prospects. Thus, I believe there is a limited margin of safety embedded into the stock.
Accordingly, I remain neutral on SBA Communications.
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