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HTWS:GB - Helios Towers


aglittell
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I figured it was time for Helios to have its own thread.

 

Helios owns cell towers in Africa. They are the market leader in three of the five markets they serve. These markets have macro tailwinds - large population growth (>37mm over the next 5 years), lack of fixed line infrastructure with vast geographic area, and growing economies (projected at 4.9% GDP growth/year for the next 5 years).

 

This is a good primer for people who are new to the tower industry: https://bit.ly/2wZbz0L.

 

But in summary the economics of the tower industry are very good. Helios earned about 14% on their invested capital last year, but the business scales very well so this should continue to increase. The economies of scale stem from the ability to add tenants to towers (noted by the increase in their tenant-to-site ratio) and also different capabilities as technologies advance. Helios had an adjusted EBITDA margin of 55% on last quarter's annualized adj EBITDA. The company targets 55-60% adj EBITDA margins long-term.

 

If they hit their goal of 12k sites in the next 5 years, expand tenant per site ratio by .02 and increase revenue per tenant by 2% (around CPI) for each of the next 5 years, adj EBITDA would be $440mm assuming constant adj EBITDA margin at 55%. That would position them as the leading tower operator in Africa with all of the mobile penetration and economic growth tailwinds that accompany that. What would that business be worth? Probably more than 12x EBITDA which is where it currently trades. 

 

I'm early in the DD process but it seems compelling. A few things I need to get comfortable with. I want to get a better grasp of the rent escalators in place with these contracts; revenue per tenant growth has been choppy. Also need to dig deeper to see what costs are being excluded in the Adj EBITDA line-item. In their Senegal site acquisition, they paid 12x run rate EBITDA. How much debt is needed to fund the 12k site goal? Also what is the overhang from Helios Capital's PE exit? I see they own 12% of the outstanding but there is only a 51% float on the stock. If the IPO lockup was 1 year, they would've been free to begin selling in Oct. I haven't seen an updated holdings size for them or Newlight Mgmt (own 15% of OS) since last December.

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Here is my view.

In the US, the cellphone tower market had excellent return. American Towers went up by a factor of 300 since 2004, SBA Communications went up 1000 fold!

Now mobile phones in Africa are super important. Mobile Payments account to 10% of the GDP in Sub Saharan Africa [1]. This requires a reliable mobile connection and a lot of africa needs yet to be connected to cell phone towers [2]

With the price of mobile phones falling in the budget sector, I expect to have a decent growth of mobile users.

 

Now they do have competitors. American Towers tries to break into the African market by aquiring Eaton Towers in 2019, and as does the privately held IHS Towers (they planned to IPO in August). IHS is much bigger than Helios Towers owning about 50% of the independent towers in Africa.

There are still a lot of towers that are property of the mobile carriers, unlike the US where 90% are owned by independent tower companies. Aquisitions are a major part of Helios future plan. Helios Towers entered the South African market in 2019 where it will face stiff competition.

It recently won a bid for 1200 towers in Senegal, which has no competing tower company

 

Dangers are of course the African continent, where conflict are still common.

The price recently went down since Millicom sold parts of it's 16% stake of the company (owns 7.8% still).

 

I think that it is a great company. However it is not a short term play. I expect it to take about 2-3 years for the stock price to move a lot but I guess it can grow a lot

 

[1]https://riskmagazine.nl/article/2019-10-15-mobile-payments-sub-saharan-africa-is-the-number-1

[2]https://www.gsma.com/mobilefordevelopment/blog/mobile-connectivity-in-sub-saharan-africa-4g-and-3g-connections-overtake-2g-for-the-first-time/

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Helios is old technology, and too late.

Musk’s Starlink will have displaced them within a decade, offering higher bandwidth, and faster speeds at prices low enough to enable internet delivered remote banking, remote learning, and remote health care. The 2B global unbanked (many in Africa) are not going to get on the ‘on-ramp’ via cell towers.

 

Point? Helios needs to be assessed as a liquidating business, with accelerating obsolescence from year 6-10. Profit is also earned in local currency, subject to ongoing devaluation. Nothing wrong in any of this, but not a straight-forward valuation process.

 

Good luck!

 

SD

 

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Helios is old technology, and too late.

Musk’s Starlink will have displaced them with a decade, offering higher bandwidth, and faster speeds at prices low enough to enable internet delivered remote banking, remote learning, and remote health care. The 2B global unbanked (many in Africa) are not going to get on the ‘on-ramp’ via cell towers.

 

Point? Helios needs to be assessed as a liquidating business, with accelerating obsolescence from year 6-10. Profit is also earned in local currency, subject to ongoing devaluation. Nothing wrong in any of this, but not a straight-forward valuation process.

 

Good luck!

 

SD

2/3 of Helios' income is pegged to the euro or dollar.

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Helios is old technology, and too late.

Musk’s Starlink will have displaced them with a decade, offering higher bandwidth, and faster speeds at prices low enough to enable internet delivered remote banking, remote learning, and remote health care. The 2B global unbanked (many in Africa) are not going to get on the ‘on-ramp’ via cell towers.

 

Point? Helios needs to be assessed as a liquidating business, with accelerating obsolescence from year 6-10. Profit is also earned in local currency, subject to ongoing devaluation. Nothing wrong in any of this, but not a straight-forward valuation process.

 

Good luck!

 

SD

While I would love if starlink really would be here in a decade, I doubt it. Especially with mass adoption and load balancing of millions of people. Would loved to be proven wrong tho.

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I think you're going to lose on this one.

 

Starlink has just entered the the take-off phase of the innovation S-Curve, and it's Musk doing the innovating. SpaceX took roughly 5 years to replace rocket technology as we used to know it, had 100 launches on its books as at March 2018, and has the objective of reducing costs by a factor of 10.

 

Starlink already has the technology, and satellites in place. At this point it's just about adding more, they get cheaper with volume, there's no restriction on getting them there, and the more satellites the lower the OH/satellite. The various banking, education apps, etc. already exist, and cheap solar panels and laptops are becoming increasingly available. All that's really needed is fast, broadband, internet at low cost.

 

SD

 

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I think you're going to lose on this one.

 

Starlink has just entered the the take-off phase of the innovation S-Curve, and it's Musk doing the innovating. SpaceX took roughly 5 years to replace rocket technology as we used to know it, had 100 launches on its books as at March 2018, and has the objective of reducing costs by a factor of 10.

 

Starlink already has the technology, and satellites in place. At this point it's just about adding more, they get cheaper with volume, and there's no restriction on getting them there, and the more satellites the lower the OH/satellite. The various banking, education apps, etc.  already exist, and cheap solar panels and laptops are becoming increasingly available. All that's really needed is fast, broadband, internet at low cost.

 

SD

 

I'm no technology expert but isn't Starlink a replacement for fixed home broadband?  It requires a "dish" at home connected to a router.  That's not going to compete with cell phones, which are the primary customer of tower companies.

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I think you're going to lose on this one.

 

Starlink has just entered the the take-off phase of the innovation S-Curve, and it's Musk doing the innovating. SpaceX took roughly 5 years to replace rocket technology as we used to know it, had 100 launches on its books as at March 2018, and has the objective of reducing costs by a factor of 10.

 

Starlink already has the technology, and satellites in place. At this point it's just about adding more, they get cheaper with volume, and there's no restriction on getting them there, and the more satellites the lower the OH/satellite. The various banking, education apps, etc.  already exist, and cheap solar panels and laptops are becoming increasingly available. All that's really needed is fast, broadband, internet at low cost.

 

SD

As I said, I would love to be proven wrong, but I don't think we will see a mass adoption of Starlink in the next 15 years.

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Point here is that the presence of Starlink has put a ‘sell by’ date, on towers. Opinions will vary, and the date ‘range’ will be different in different markets, but it is there. Just as towers owe their existence to their infrastructure cost savings over landline copper or fibre-optic delivery, Starlink will owe its existence to their infrastructure cost savings over incremental towers and their maintenance.

 

For now, Starlink (rural) and towers (urban) are different markets - rural isn’t worth anything, hence little reason for concern. Problem is that it’s denial, and we see the identical issue in wealth management, oil/gas, and auto manufacturing. Change can’t possibly happen - then it suddenly does. Fintech is a life/death threat to established wealth management because it ‘own’s’ the kids; so, either acquire fintech or go out of business. Even an Esso is acquiring clean energy, Ford/GM is going electric. 

 

Sure, there’s a lot of juice left in the orange, but it requires a different mindset. Cell phone history has taught us that innovation is continuous, innovation cycles are shortening, and there are material upgrades every cycle. Satellites 5 years out, radically more capable than todays, and providing services at a fraction of todays cost.

 

Lots of opportunity, but all about the leadership.

We wish them luck.

 

SD

 

 

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The thing is, as someone else pointed out, Starlink needs a dish - a big receiver. Africa is a special telco market in that it's dominantly mobile, very few landlines.. Unless someone fits a dish in a 10 dollar smartphone (and I haven't done the research, is it possible?), I don't see how Starlink is a threat. Perhaps AMT, T and Charter has to worry, but I don't see why an African tower co would.

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The thing is, as someone else pointed out, Starlink needs a dish - a big receiver. Africa is a special telco market in that it's dominantly mobile, very few landlines.. Unless someone fits a dish in a 10 dollar smartphone (and I haven't done the research, is it possible?), I don't see how Starlink is a threat. Perhaps AMT, T and Charter has to worry, but I don't see why an African tower co would.

 

It is possible that years from now, the dish shrinks to an antenna in a phone. That’s a bit my beef with the tower business, is this really like an annuity or are the tower far less valuable 20 years from now? With a ~4% cash yield on assets, you need a long asset live (>30 years)  to make this business a good one. Who know what the technology looks like 30 years from now.

 

It’s different when you own RE - you can rebuild and reconfigure it and it likely still be worth something - most likely much more than it is right now due to inflation.

 

Technology however works differently and often deflationary, which is a threat for the tower business.

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Just wanted to add that management incentives look fine. LTIP is based on 1/3 relative TSR, 1/3 ebitda per share and 1/3 ROIC. I've seen worse.

 

What bothers me a bit is their high interest costs. They issued 750m during the summer @ 7 pct. They recently added another 225m above par so effective yield like 5,6 pct. which is better and arguably good considering the weak nations they operate in, but it means they're at close to 1b of gross debt @ 7 pct. Net debt is much lower, they have 466m in cash of which 189m will be used to fund the Senegal acquisition of 1.200 towers that'll add 19m of ebitda. But it's just pretty expensive financing and makes me wonder whether it sucks to be a midsized tower company. American Tower issues ten year bonds below 2 pct. Every 100 bps saved is a massive boost to FCF considering the leverage.

 

As for Helios Towers the interest on their gross debt consumes almost half of their 177m in so called Last Quarter Annualised Portfolio Free Cash Flow which only increased 5 pct. versus 2019. It means they don't really generate all that much free cash flow (before growth capex).

 

But I suppose herein also lies the opportunity. Because keeping interest costs steady, any uptick in ebitda should mostly be converted to FCF, and historically they've shown good organic growth (escalators, increased cells on towers, margin expansion). A combination of increasing cash flows, less concentration risk down the line (when they expand to new countries) and more income pegged to USD or euro should lower finance costs further down the line. But those 7 pct. notes they issued during the summer are a 'lil annoying. Their much higher cost of capital makes it somewhat of a bummer to compete with AMT for acquisitions, but I suppose some of the deals Helios are looking at are just too minor for AMT to even bother.

 

According to analysts Helios trades at a bit less than 10x2021 ebitda. AMT reportedly paid 12xebitda for Eaton Towers but supposedly closer to 13,2x. No opinon as to whether that's a fair comp, but there's some data here: https://www.towerxchange.com/deal-analysis-american-tower-to-acquire-eaton-towers/

 

I think the biggest risk here are Tanazania, the 33 pct of income not pegged to USD or Euro and them buying a turd (or M&A not materializing). Appreciate the input on Starlink, but considering where AMT trades I don't think that is an overhang on Helios.

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Hate to tell you this, but all you need is a fractal antenna and a parabolic reflector. Most cellphones already use a fractal antenna.

https://www.instructables.com/Making-a-3D-Printed-Fractal-Antenna-with-a-Parabol/

 

Today Starlink is not really a practical solution for general use, but neither was the first Samsung cellphone.

However, today's Samsung cellphone? entirely different. Musk is essentially doing the same thing.

 

SD

 

 

 

 

 

 

 

 

 

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Just wanted to add that management incentives look fine. LTIP is based on 1/3 relative TSR, 1/3 ebitda per share and 1/3 ROIC. I've seen worse.

 

What bothers me a bit is their high interest costs. They issued 750m during the summer @ 7 pct. They recently added another 225m above par so effective yield like 5,6 pct. which is better and arguably good considering the weak nations they operate in, but it means they're at close to 1b of gross debt @ 7 pct. Net debt is much lower, they have 466m in cash of which 189m will be used to fund the Senegal acquisition of 1.200 towers that'll add 19m of ebitda. But it's just pretty expensive financing and makes me wonder whether it sucks to be a midsized tower company. American Tower issues ten year bonds below 2 pct. Every 100 bps saved is a massive boost to FCF considering the leverage.

 

As for Helios Towers the interest on their gross debt consumes almost half of their 177m in so called Last Quarter Annualised Portfolio Free Cash Flow which only increased 5 pct. versus 2019. It means they don't really generate all that much free cash flow (before growth capex).

 

But I suppose herein also lies the opportunity. Because keeping interest costs steady, any uptick in ebitda should mostly be converted to FCF, and historically they've shown good organic growth (escalators, increased cells on towers, margin expansion). A combination of increasing cash flows, less concentration risk down the line (when they expand to new countries) and more income pegged to USD or euro should lower finance costs further down the line. But those 7 pct. notes they issued during the summer are a 'lil annoying. Their much higher cost of capital makes it somewhat of a bummer to compete with AMT for acquisitions, but I suppose some of the deals Helios are looking at are just too minor for AMT to even bother.

 

According to analysts Helios trades at a bit less than 10x2021 ebitda. AMT reportedly paid 12xebitda for Eaton Towers but supposedly closer to 13,2x. No opinon as to whether that's a fair comp, but there's some data here: https://www.towerxchange.com/deal-analysis-american-tower-to-acquire-eaton-towers/

 

I think the biggest risk here are Tanazania, the 33 pct of income not pegged to USD or Euro and them buying a turd (or M&A not materializing). Appreciate the input on Starlink, but considering where AMT trades I don't think that is an overhang on Helios.

 

I would be careful assuming that currency pegs remain in place. They can only remain in place if the underlying economy and fiscal policy (inflation) performs similar to the currency it is pegged to. If not, the currency peg will blow up, it is just a question when. The high interest rates that Helios is paying May be an indication of the credit risk that bond holders are seeing. Business like this often lever up in low interest rate currencies while having cash flows in volatile emerging market currencies. That’s some inherent risk that on needs to be aware of.

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Regarding the point about 6G/satellites making towers obsolete: according to AMT's 10K, 2G and 3G are still being deployed in international markets. So while 5G/6G will eleviate some of the bottleneck with 2G/3G/4G towers, towers will likely be around for a very long time. Towers pricing power may diminish a little but it seems more like a road network where new traffic continually grows to fill all available routes.

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The issue is not towers going away, it is their becoming obsolete sooner than thought.

Both feet, and the horse and buggy work perfectly well as transportation - but motor cars do it a whole lot better.

 

12,000 satellites (so far), and they've just received very big grants to beam internet to rural America - despite industry opposition.

Once the infrastructure is up (& paid for), adding satellites for African use will be very cheap. Sure it will take some time, but it is going to happen, and it is going to start biting 5-10 yrs out. Long term, if the towers are not to eventually become stranded assets they are going to have to add a better/different value-add over time.

 

https://www.internetgovernancehub.blog/2020/12/09/fcc-announces-billions-of-dollars-in-awards-to-provide-rural-areas-with-broadband-access/

 

SD

 

 

 

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The issue is not towers going away, it is their becoming obsolete sooner than thought.

Both feet, and the horse and buggy work perfectly well as transportation - but motor cars do it a whole lot better.

 

12,000 satellites (so far), and they've just received very big grants to beam internet to rural America - despite industry opposition.

Once the infrastructure is up (& paid for), adding satellites for African use will be very cheap.

SD

 

I think the bigger issue, rather than satellites which might be a threat in Africa but aren't in developed economies, is the ease of putting a tower next to another tower.  In the U.S., it's virtually impossible to put a cell tower in close enough proximity to an existing tower to create a true substitute for that radius.  I don't know what countries Helios operates in, but I imagine the regulatory barriers don't exist in nearly the same way.  Your tenants can credibly threaten to put their own tower 20 feet away, so the pricing power isn't the same.

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From what I understand, Starlinks satellites orbit at an altitude of 341 miles with 20-40 milliseconds of latency. That may not make for a great experience for certain applications, self-driving cars for example where milliseconds could mean life and death.

 

It's better than 4G latency at 200ms but worse than 5G latency is 1ms. Will customers get excited about a technology that offers lower performance than they will be accustomed to getting on 5G?

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