Data Centers: Finding Opportunity in the Storm

Digital Realty’s guidance sent shockwaves throughout the data centers this week.  We had cautioned a month ago (and again earlier this week), that guidance was likely to come in below consensus (LINK).  Financial guidance came in as we expected, but two metrics were worse than we expected: 1) DLR lowered their return threshold for new data center builds; and 2) DLR guided to sharply declining lease renewal rates this year (LINK).  Both of these factors demonstrate the risk of pursuing hyperscale deals with little underlying asset differentiation, a risk which extends to the entire wholesale data center industry.  We believe the negative sentiment on the sector provides an opportunity to buy EQIX at depressed prices, since EQIX is largely insulated from pricing risk due to their focus on retail customers and their interconnection strategy.  We see potential for 40% upside to EQIX over the next 12 months.

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Can Towers Stand Tall Through Carrier M&A?

Wireless carrier consolidation is a tower investor’s worst fear.  Entire networks can be eliminated, driving a sharp loss in tenants that cuts straight to the bottom line.  Often overlooked, however, are the benefits to tower companies from the combination of networks and a healthier market structure.  In this Global Weekly Review, we highlight our views on the impact of carrier consolidation to tower companies globally.  In most cases, carrier consolidation results in a net negative outcome for towers; however, in some cases, it can lead to a stronger growth.  We believe carrier M&A offers opportunities for investors own towers in US and Europe, and avoid towers in India and China.

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Asia Tour – Japanese Telcos and China Front of Mind

The Asian tour in December each year is a great way to get to the bottom of the developing trends and embed our thinking as we head into the New Year. This year was no different as we met with the Japanese, Taiwanese, Chinese and Malaysian telecom operators. In Japan, we were pleasantly surprised by the confidence the operators had to lower costs to defend against any risk around tariff headwinds and we remain sanguine around the prospects of Rakuten’s launch. With returns and shareholder returns unlikely to be impacted in 2019, we came away reassured that our preferred play (NTT) is likely to lead the market in return improvements. On our return, we upgraded China Tower to a Buy given the stock’s lacklustre performance, but most importantly the ability to access 10mn ‘social resources’ assured us that future growth was unlikely to be as capital intensive as initially feared.

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We Have Spectrum On Our Minds

We are thinking about spectrum again, as we head into the weekend. We thought about it last weekend because we were putting the finishing touches on a report on the C-Band in the US (LINK). It is the first in a series that will endeavor to quantify the threats and opportunities presented to Wireless, Cable and Satellite companies as this new band comes to market.
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Not All (UK) Infrastructure Assets Are Alike

We tend to like global infrastructure assets. In the best case scenario, they often have captive demand and no regulation, which can lead to superior pricing power – think US towers or datacentres (see most recent report HERE). But infrastructure assets always tend to have captive demand, so even in the case of European tower infrastructure, less attractive contracts still afford investors good earnings visibility with upside optionality from infrastructure expansion (recent note on Inwit highlighting this HERE).

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Apple’s Woes May Be Good for The Carriers

As most of you hopefully know, Pierre Ferragu, who covers Apple at New Street, has had a phenomenal call on Apple’s iPhone sales falling short of expectations (see his downgrade to Sell HERE). He was right on 3Q volumes, and the call has been building into 4Q as Apple’s suppliers, one after another, warn of cancelled orders (details HERE).

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Global Towers Update – The Predictability of Divergence

As telecoms asset classes go, towers should be more predictable than most, and the recent earnings season has laid bare the diverging trends seen between some of the developed market tower companies and the emerging market ones. We are seeing positive trends emerge for tower companies in developed markets like SBAC, Inwit, and to a lesser extent Cellnex. Meanwhile, the outlook in India Bharti Infratel remains difficult and AMT remains stuck in the middle with a foot in both camps.

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