Fundamental analysis of CELLNEX

CELLNEX TELECOM, S.A.

CIF A64907306 Spain Infrastructure Comunications IBEX35 seen 1404 times Analysis date 17 September 2020

CELLNEX TELECOM, S.A. is a company dedicated to telecommunication services and infrastructures, currently it is the main operator in Spain and provides services in 7 other countries. Cellnex was born from the sale of the business by Abertis, going public and sailing alone. On the other hand, Abertis would be absorbed by ACS and Atlantia and would no longer be listed on the stock exchange.
Its activity is divided into 4 main areas:
  • Infrastructure services: It has more than 60,000 sites that it rents to telephone operators for their use.
  • Audiovisual broadcasting networks: Similar to telephony, but for television broadcasting.
  • DAS & Small Cells: System that provides wireless connectivity in reduced spaces to many users. Such as airports, shopping malls, resorts...
  • Solutions (drawer of tailor): Internet of the things, Smart things and ideas at present little landed.
Cellnex has an attractive business and seems to be profitable. Will it be so?


The goal of this analysis is to understand how CELLNEX TELECOM, S.A.'s business is, to know how it is managed and to decide if it is an option to incorporate it into a Buy&Hold focused portfolio. We usually divide the analysis into 3 sections to better organize ourselves: the balance sheet, the income statement and the final valuation. As always, all the data shown in this analysis has been obtained from the CNMV website and you can consult many other ratios of the company in this page.


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1 Balance Sheet Analysis

To begin with, let's take a look at the capital structure of CELLNEX TELECOM, S.A., that is, what it spends the money on (and how much) as well as to whom it is owed (and how much). We will calculate some ratios and see their progression over time. We are going to organize it in the following points:
  • 1.1 Analysis of the asset
  • 1.2 Analysis of liabilities and net worth
  • 1.3 Indebtedness
  • 1.4 Safety margin
  • 1.5 Liquidity/Treasury
  • 1.6 Working capital



1.1 Analysis of Assets

The structure of the assets will indicate the degree of immobilization of CELLNEX TELECOM, S.A.'s resources. That is, how much of its total assets are fixed assets (real estate, investments, goodwill, etc). In this case:

Immobilization = Fixed Assets / Total Assets = 78.20%



Inmovilization

The immobilization has been modified in these 5 years, as a result of the multiple acquisitions that the company is carrying out. For the moment it has varied and has even decreased by 70%, in the future we will see if it stabilizes or if it continues with ups and downs.


We will break down the asset as a function of time, so we will make visible which part is current asset and which part is fixed asset. Its variation over time can give us information on profound changes in the company:


Breakdown of Total Assets

In the graph of the breakdown of assets we can see how the absolute value of assets has grown enormously, hence the variation in fixed assets. Cellnex is making a very strong commitment to growth, we will see later how this feels for the income statement and the debt and liquidity ratios.
We will break down both to know the items that compose it, firstly the fixed asset:


Breakdown of Fixed Assets

In addition to the great increase in absolute values, we see that the item "Intangible assets" has been increased in proportion to the others. Cellnex explains this item as follows:
"Refers to the assignments of use acquired by the Group and which are valued at their acquisition price or production cost and are amortized on a straight-line basis over the contractual period, between 10 and 40 years."

They can range from land to radio spectrum licenses. Something that is not physically owned by the company, but has a value that must be accounted for and amortized.

The breakdown of the items is as follows:
  • Intangible assets (55.73%)
  • Tangible fixed assets (28.68%)
  • Goodwill (13.07%)
  • Deferred tax assets (1.38%)
  • Non-current financial assets (0.94%)
  • Other non-current assets (0.17%)
  • Investments accounted for using the equity method (0.03%)
We do the same with the current assets:


Breakdown of Current Assets

In the case of current assets, cash has grown a lot, currently constituting 86%, almost 3 billion euros. As we say, this is the result of the capital received from the capital increases. As for the rest of the items, their proportion is as follows:
  • Effective (86.41%)
  • Customers by sales (9.48%)
  • Current tax assets (2.13%)
  • Other current financial assets (0.99%)
  • Other debtors (0.86%)
  • Stocks (0.13%)
  • Other current assets (0.00%)



1.2 Liability Analysis

In this section we will see the structure of the liabilities of CELLNEX TELECOM, S.A., which gives us information about the origin of the resources available to the company. It tells us where the money comes from and to whom it is owed. To find out the proportion of capital belonging to the company compared to that belonging to others, we have the following formula:

% of equity capital = Equity / Total Capital = 33.60%



Own capital

The equity has also increased significantly over the past 2 years thanks to the capital increases made. Specifically, there have been 3 increases in just 2 years.
As with the assets, we will break down the items that make up each part of the liabilities. We will start with a grouped chart (net worth, fixed and current liabilities) and then break down each of them:


Breakdown of Liabilities

Seeing how the liabilities look in the stacked graph, we confirm what we have commented. On the one hand, liabilities/equity grows strongly thanks to the capital increases. On the other hand, both net equity and fixed liabilities are growing the most in proportion, with current liabilities lagging behind but also growing.
We started by breaking down equity:


Breakdown of Equity

The net equity grows supported by the items of minority interests (capital belonging to third parties of controlled companies but which is accounted for by having consolidated the accounts) and by the share premium.
. The big difference from a company that grows organically to one that is not here. Organic growth shows a gradual increase in reserves, which is a benefit from previous years that is not distributed as a dividend and becomes part of the capital base. Inorganic growth is what we see at Cellnex; equity grows through increases in the share premium.
The most important items that make up the net worth are:
  • Emission premium (77.80%)
  • Minority interests (18.05%)
  • Reservations (3,14%)
  • Registered capital (1.93%)
We continue with the current liabilities:


Breakdown of Current Liabilities

As for current liabilities, all items grow similarly. It should be noted that the debts to credit institutions in the short term are very low, we will see how the financial expenses are.
The most important items that compose it are:
  • Suppliers (30.95%)
  • Other short term financial liabilities (30.28%)
  • Other creditors (19.74%)
  • Current tax liabilities (11.14%)
  • Short-term debt with credit institutions (5.32%)
  • Other current liabilities (2.56%)
As for fixed liabilities:


Breakdown of Fixed Liabilities

Fixed liabilities are showing strong growth, especially now, thanks to debts with credit institutions. Although they are long-term debts, they are debts at the end of the day and have an associated cost. A little later we will see how this affects debt ratios and the company's ability to repay the loan.
The most important items that compose it are:
  • Long-term debt with credit institutions (68.32%)
  • Other long-term financial liabilities (10.96%)
  • Deferred tax liabilities (10.25%)
  • Non-current provisions (10.20%)
  • Other non-current liabilities (0.27%)



1.3 Debt Analysis

Once we have seen the composition of the balance sheet in a general way, let's review some ratios. A very important concept in the valuation of a company is the debt, since a company that has no debts can not go bankrupt. The progression of the debt ratio tells us how big a company's debts are in relation to its own resources:

Debt = Outside Capital / Own Capital = 197.58%>/center>


Indebtedness

The debt ratio is currently at very reasonable levels thanks to the recent capital increases. Cellnex came from a ratio above 700% and has remained at a more comfortable 200%. The question is whether it will remain that way or whether it will continue to waver in the near future. There is also the question of whether the company will be able to get rid of debt without resorting to asking for money from new shareholders. Despite the fact that the business comes from Abertis, the company has little time to live and we don't know the style of the management team. We can already see ways that are creaking us out, but we need more time to make sure. To put it in context, the average debt of the sectors where it operates is Therefore, 200% is not a bad figure in itself.


Indebtedness on EBIT

The debt over EBIT is a ratio that gives us more information than the previous one, since it relates it to the company's capacity to pay debts, the operating profit (EBIT). In this case, Cellnex has a fairly high debt. Currently, the debt is 80 times the EBIT, well above something reasonable. Perhaps because the EBIT is being extraordinarily low? We'll see when we analyze the income statement, but if so, it's not a one-off. In Cellnex's five-year history, it has not done much better.


1.4 Safety Margin

In order to operate properly, companies normally need their fixed assets to be covered by their own capital plus long-term debts. This is known as the safety margin. Otherwise it would mean that part of the company's fixed assets (offices, land, machinery, financial assets...) have to be paid with short-term debt, which can be quite dangerous. This is not something that should be fulfilled yes or yes, but it is a sign of good health.

Safety margin = Fixed Assets / (Equity + Fixed Liabilities) = 121.22%>/center>


Margin of Safety

The safety margin is above 100% and in a slightly upward trend. Because you don't have large short-term debts, you can cope with them without difficulty.


1.5 Liquidity/Treasury

The liquidity ratio tells us the company's ability to get rid of current liabilities if needed.

Liquidity = Current Assets / Current Liabilities = 418.80%>/center>

If we represent it over time:


Liquidity

Liquidity must always be close to 100%, otherwise there may be problems paying debt maturities or short term payments. In the case of CELLNEX TELECOM, S.A., it has very high liquidity, thanks to the fact that it keeps part of the income from capital increases in cash. We do not consider this realistic in a normal company situation. This ratio will return to normal values when Cellnex digests the capital increases.


1.6 Working Capital

The working capital indicates the amount of current assets that are financed with permanent resources. The higher it is, the fewer financing problems there will be if there are quarters with less turnover. To evaluate working capital we relate it to current assets and sales:

Maneuvering fund on assets = (Current Assets - Current Liabilities) / Current Assets = 76,12%>/center>
Sales Working Capital = (Current Assets - Current Liabilities) / sales = 199.51%>/center>


Working Balance

The working capital is positive and quite high. A working capital of 200% of sales is a great figure, but we're back to the same thing. It is distorted by the 3 billion euros that it keeps in the cash box and that will most certainly be used in some large corporate purchase.


2 Income Statement Analysis

When studying the income statement we will calculate the following ratios and their progression over time:
  • 2.1 Analysis of income, expenses and profit
  • 2.2 Return on Equity (ROE) and Return on assets (ROA)
  • 2.3 Margin on sales



2.1 Analysis of income, expenses and profit

We start with net profit and FGO (funds generated by operations): In Fundamental Analysis we like to show the FGO next to the net profit, which is the money that the company has managed to earn. To calculate it, we add the amortizations to the net profit and thus avoid possible adjustments by decreasing this concept. Some companies may be forced to make up the profit in this way if they have not done particularly well.

FGO = Net Profit + Amortization



Profit vs Funds from Operations

In the above graph we show the FGO next to the net profit and what is extracted is that there is a big difference between the two. Not only does one go up and the other go down, but one goes up and the other goes down. What is the reason for this difference? Basically because of amortization, which in the case of Cellnex is extremely high. A little further up we saw that intangible assets represented a large part of the fixed assets. These are assignments of use that have to be paid for by means of 10 and 40 year amortizations. Therefore, what weighs on Cellnex's results (among other things) are the enormous amortizations it has to pay for taking over the rights to exploit the radio-electric spectrum, for the use of land or infrastructure. Inevitably, for a company to make money it needs income, so let's see how it looks:


Sales

Sales are increasing semester by semester, which indicates that the business generates income and has life ahead of it, as well as the capacity to increase it. Another data that is usually interesting is the breakdown of expenses:


Expenses

As we have said, amortization is a very large item in expenses, which leads Cellnex to be around the losses in these years. The problem we see here is that amortizations in principle will not go down, so you do not have many more options than reducing other expenses or increasing income. All this before seeing how the financial expenses are going, which we show in the following graph.
We see that EBIT does not exceed financial expenses, so here we have another problem. If EBIT is not enough to pay the interest on the debt, we are in an ugly situation that must be corrected as soon as possible.


Financial Expenses vs EBIT

2.2 Return on equity (ROE) and Return on assets (ROA)

The ROE, or Return on equity, measures CELLNEX TELECOM, S.A.'s profits compared to its own funds. It is a way of measuring the profitability and quality of business management. It only makes sense to see it this way when it is a sustained ROE over time. A high ROE in an isolated exercise can be caused by an increase in debt, which gives a greater capacity to buy assets and therefore, an increase in profit. The problem comes later, when that debt has to be paid and expenses skyrocket:

ROE = Net Profit / Equity = -1.27%



ROE

As expected, the ROE is negative and has been falling since 2016. The profitability of the business is hampered by the aggressiveness of purchases and capital increases for growth. We can say the same about ROA:


ROA

2.3 Margin on Sales

Let's calculate the margin on sales of CELLNEX TELECOM, S.A., that is to say, what proportion of sales ends up being constant and sound profit:

Margin on Sales = Net Profit / Sales = -4.21%>/center>


Beneficio over Sales

The profit on sales is again distorted by the company's situation. We can also see how the margins of CELLNEX TELECOM, S.A. behave. On the one hand, we have the operating margin, which tells us what proportion of sales ends up being EBIT. On the other hand, the operating margin tells us what proportion of sales ends up being profit before taxes.


Margins

The operating margin is reasonable, even though depreciation eats up a large part of the income. In fact, if financial expenses were lower we would be talking about a totally different movie. As for the operating margin, it already includes financial expenses and falls into negative territory.


3 Dividend and general valuation




Currently, CELLNEX TELECOM, S.A. has 486,709,000 shares in circulation, with a treasury stock of 0.015%. It has a EPS of -0.11€ and is currently paying a dividend of 0.07€ per share per year, i.e. a payout of -64.74%. It goes without saying that to distribute a dividend in the situation in which the company finds itself is irresponsible. One thing is that they launch to make capital increases to access business opportunities or that the debts with cost increase to grow faster. But another thing is that they also want to distribute dividends promising an increase of 10% per year, something totally fantasy. For more inri, the dividend that distributes is with charge to premiums of emission, that is to say, it leaves of the money that the new shareholders have put in the company. This reminds us of the basic scheme of a pyramid scheme, that the new shareholders pay the profitability of those who were already in the company.


Payout

In conclusion, at current prices (52.62€) it gives a dividend yield of 0.13%, the book value is 10.23€ per share and the PER is -493.10. In our opinion, Cellnex's business may be profitable in the future, but it is currently immersed in a wild and somewhat irresponsible growth process. We do not think that the management of the company is being correct and therefore we would not include it in our portfolio at any price. To reconsider our opinion, several things should happen:
  • The dividend should be paid out while the company is at a loss and while there are very interesting investment opportunities for which the company would like to borrow money.
  • You should be setting out a reasonable and credible shareholder compensation plan, not ensuring 10% growth that you know you cannot deliver. Of course, never distribute a dividend from share premiums.
  • It should drastically reduce financial expenses.
  • Last but not least, you should increase sales or reduce amortization/expenses. In order to achieve a more powerful EBIT.
Until then, good luck.


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Balance, Income Statement, Cash Flow...
Employees 91 (33.00% women)
Profit -51.94M €
Earnings per share 0.14 €
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