2023-04-20 13:15:59 ET
Summary
- Shenandoah Telecommunications offers connectivity services through fiber optics and Wi-Fi networks, mainly in the mid-Atlantic coast in the United States.
- In the long term, I believe that successful addition of customers for its Glo Fiber will bring substantial FCF.
- In my view, investors should read the expectations of management with respect to the expected ramping up of construction and sales as well as the Fiber First growth plan.
Shenandoah Telecommunications Company (SHEN) recently delivered double digit revenue growth in fiber sales, and management remains quite optimistic about future ramping up in construction and sales. I believe that further beneficial numbers around strong customer satisfaction, bandwidth speeds, and competitive costs will likely position the SHEN brand positively. As a result, I believe that we could see more partnerships signed with telecom associations, M&A operations, and more support from financial institutions. There are some risks from regulators and failed expansion into new territories, however I believe that the stock appears undervalued.
Shenandoah Telecommunications: Glo Fiber Sales Growth Was Close To 96% In 2022
Shenandoah Telecommunications offers connectivity services through fiber optics and Wi-Fi networks mainly in the mid-Atlantic coast in the United States.
The company has managed to capitalize on the needs of a growing population in addition to the new forms of entertainment and communication, in which access to Internet services appears to be one of the main bases of daily life.
The company's business model is divided into two large segments. One segment is dedicated exclusively to broadband service through fiber optic, hybrid fiber, and dark fiber through its subsidiaries Glo Fiber, Beam, and Shentel, mainly to merchants and individuals in the Virginia, Pennsylvania, and Kentucky areas. Currently, the company has a fiber fabric calculated at 7400 miles. I believe that investors will do good by having a look at the impressive revenue growth shown by the Glo Fiber. In 2022, Glo Fiber revenue growth for broadband homes and businesses increased by more than 96%. Glo Fiber for residential and SMB RGUs also increased significantly.
The other segment of its business model includes the business of towers for Wi-Fi services, which, in addition to making them available for their own networks, are part of commercial agreements with other service provider companies that use these towers. Shenandoah currently has 220 towers distributed along the mid-Atlantic Coast region. The revenue from this business segment is smaller as compared to the broadband service business unit.
With that about the financial figures for 2022, the recent reaction of management was, in my view, quite optimistic. I believe that investors should read the expectations of management with respect to the expected ramping up of construction and sales as well as the Fiber First growth plan.
We executed very well on our Glo Fiber business plan in 2022, more than doubling our customers and expanding our network passings 96%.
As we continue to execute on our Fiber First growth plan, we are ramping up construction and sales to take advantage of the attractive market opportunity
Source: Quarterly Press Release
Market Expectations Include Double Digit Sales Growth And EBITDA Growth In 2025
I believe that market expectations are quite beneficial. Market analysts are expecting 2024 net sales of $329 million, 2024 EBITDA close to $98 million, and operating profit of $6 million. It is also worth noting that net sales growth is expected to be close to double digit in 2024 and 2025, and 2025 EBITDA growth is expected to reach 47%.
Balance Sheet: Property And Equipment Increased Significantly In 2022
In 2022, the company suffered a decrease in total current assets driven by less cash in hand, less accounts receivable, and less income taxes receivable. With that, it is beneficial that property and equipment increased significantly, which explains why the total amount of assets increased.
As of December 31, 2022, Shenandoah reported cash and cash equivalents close to $44 million, accounts receivable of $20 million, and income taxes receivable of around $29 million. Besides, with prepaid expenses of $11 million, total current assets stand at $128 million.
Property, plant and equipment was equal to $687 million with goodwill and intangible assets close to $81 million and operating lease right-of-use assets close to $53 million. Finally, total assets were equal to $977 million, significantly more than the total amount of liabilities. I believe that the current state of the balance sheet is quite solid.
Shenandoah Telecommunications does not need to hold a lot of debt because clients appear to be financing the business. Accounts payable stands at $49 million, and advanced billings and customer deposits are equal to $12 million. Debt includes long-term debt close to $74 million, which seems a small amount of debt. In my view, management could issue more debt if necessary.
Finally, deferred income taxes were equal to $84 million with asset retirement obligations of $9.9 million, benefit plan obligations close to $3 million, and total other long-term liabilities close to $168 million.
Competitors And Competitive Advantages
Shenandoah's competitors are both locally oriented companies and global service provider companies, such as Netflix ( NFLX ) or Disney (DIS). There are also other large competitors like Verizon ( VZ ) and Comcast (CMCSA), which provide similar services in the region and nationally.
As the incumbent cable provider passing over 212,000 homes, we compete directly against the incumbent local telephone companies in 100% of our passings that provide DSL data and voice services over hybrid fiber and copper-based networks, a broadband overbuilder provider in approximately 13% of our passings that provision broadband service over hybrid fiber coaxial cable or fiber optics networks and indirectly from wireless substitution as the bandwidth speeds from wireless providers have increased with network upgrades to 5th generation technology. Source: Annual Report
If we think about the competition at the level of fiber connections, it is relevant to note that Shenandoah offers service operability and competitive prices. Besides, in my view, the current brand positioning and successful potential identification of consumers at the regional level can play a fundamental role in attracting new clients.
Regarding competition in the tower segment, Shenandoah Telecommunications also has regional competitors using similar rental services to locate their antennas. In this sense, I believe that the possibility of lowering the cost of its operations is the greatest point in favor of Shenandoah, which can offer a competitive advantage over regional competitors.
My DCF Model And My Assumptions Implied A Valuation Of $23-$24
Under my DCF model, I assumed that Shenandoah Telecommunications would successfully find sufficient resources and capital to build further property and equipment. In the long term, I believe that successful addition of customers for the Glo Fiber would bring substantial FCF.
I also assumed that customer satisfaction will continue to accelerate client acquisition, which will likely drive the average revenue per user up. In this regard, I believe that it is worth noting that Shenandoah Telecommunications obtained strong customer satisfaction, adequate bandwidth speeds, and competitive cost to pass, which are some of the key performance indicators that shareholders need to monitor carefully. If the numbers continue to be that optimistic, I do not see why sales growth would decline over time.
Source: Investor Presentation Q4 2022
Under my cash flow model, I also assumed that Shenandoah will be able to acquire other competitors, and will find debt financing to do so. It is also worth mentioning that the total amount of debt is small, and bankers will most likely offer money to enter this market.
As part of our business strategy, we regularly evaluate opportunities to enhance the value of the Company by pursuing acquisitions of other businesses. Source: Annual Report
I would also expect new partnerships with telecom associations to deploy fiber-to-the-home broadband services like those recently signed with Homeowner's Association of Ford's Colony. Considering the expertise of Shenandoah Telecommunications in the field, I believe that we could expect many more agreements, which would likely enhance revenue growth.
Glo Fiber, powered by Shenandoah Telecommunications Company, announced that they have formed a partnership with the Homeowner's Association of Ford's Colony to deploy next generation fiber-to-the-home broadband services to Ford's Colony residents. Source: Glo Fiber Announces Partnership with Ford's Colony at Williamsburg
My financial modeling included 2033 net income of $87 million, depreciation close to $60 million, stock-based compensation expenses of around $5 million, deferred income taxes of -$10 million, and restructuring expenses of close to $6 million.
Also, with changes in accounts receivable of $28 million, current income taxes worth $122 million, changes in accounts payable of -$3 million, and changes in other deferrals and accruals of around -$16 million, 2033 cash flow from operations would stand at $334 million. Finally, with 2033 capital expenditures of -$61 million, 2033 FCF would be around $273 million.
With an EV/FCF multiple of 11x, I obtained residual FCF of $3.012 billion. Besides, with a cost of capital of 8.5%, I obtained an enterprise value of $1.233 billion. If we also add cash and cash equivalents of $44 million, long-term debt of $74 million, and benefit plan obligations of $3 million, the equity valuation would stand at $1.199 billion, and the fair price would stand at $23-$24 per share.
Risks
Among the risk factors, I would highlight that failed expansion strategies could lower the ability to receive new clients. Shareholders and debt investors may decide to give less capital to Shenandoah Telecommunications, which may increase the cost of capital, and may lower the valuation of each share.
Shenandoah is exposed to high market competition from large corporations with greater resources. Hence, implementation of new investments must be orderly and coherent, otherwise any potential area of ??development could be occupied by one of these competitors.
Failed acquisition strategies could also be quite traumatic. If the merger integration is not properly done, or the assets acquired are not as profitable as expected, the demand for the stock would most likely decline. Besides, integrating new facilities and combination of technologies acquired may also complicate the business expansion.
In my view, Shenandoah must establish itself in the regional sphere as a credible and recognized brand. Besides, I believe that the company still needs to prove that its branding strategy is effective at the national level. For this, without correct reading of the clients' needs, a good support to consumers, and a clear strategy of innovation, acquisition, and lowering of costs, I believe that Shenandoah may grow slower than expected.
Finally, I believe that unexpected changes in regulations with respect to communication in Virginia, Maryland, Pennsylvania, and Kentucky, or at a national level could significantly deteriorate the FCF expectations of Shenandoah Telecommunications. If unexpected capex is required by law, I believe that FCF would decline.
Our operations are subject to regulation by the Federal Communications Commission, the Virginia State Corporation Commission, the West Virginia Public Service Commission, the Maryland Public Service Commission, the Pennsylvania Public Utility Commission, the Kentucky Public Service Commission and other federal, state, and local governmental agencies. Source: Annual Report
I also believe that drastic changes in the way data privacy is regulated could affect future cash flow statements. Management was very clear about this topic in recent reports. The Company is subject to various federal and state laws intended to protect the privacy of end-users who subscribe to the Company's services. Source: Annual Report
Conclusion
Shenandoah Telecommunications delivered significant fiber revenue growth for broadband homes and businesses. In my opinion, if the company continues to report strong customer satisfaction, bandwidth speeds, and competitive cost to pass, I believe that future cash flow statements will be as good as in 2022. Besides, considering the optimistic words from management about incoming ramping up of construction and the state of the balance sheet, in my view, there is room for significant inorganic growth. Finally, given the expertise in deploying fiber, I would be expecting new partnerships with associations like that signed with the Homeowner's Association of Ford's Colony. Even taking into consideration potential risks from failed business expansion, competitors, or new regulations, in my view, the stock remains undervalued.
For further details see:
Shenandoah Telecommunications: Risks, But Cheap, And Fiber Sales Growth