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The Update:
Frontier Communications Parent (NASDAQ:FYBR) presented at the Citigroup AppsEconomy Virtual Conference today. The two big news items of the presentation were:
- the company added 45,000 new (net of lost subscribers) fiber broadband customers in the fourth quarter. This growth is a considerable acceleration from the previous best quarter which was the third quarter of 2021 when it added 29,000 new net fiber customers.
- the company added 9,000 total new (net of lost subscribers) broadband customers. This means the company added more net fiber subscribers than they lost in copper DSL net subscribers.
Both of these net addition numbers are significant. The net fiber adds were well above street consensus additions of 31,000 and prove the company's fiber rollouts are starting to pay dividends. It also continues the growth trend the company has shown since entering bankruptcy.
Fiber Additions by Quarter
source Frontier Q3 2021 earnings presentation
The total net broadband additions are significant as they suggest that not only can Frontier's fiber EBITDA growth more or less offset copper EBITDA growth in 2022, fiber growth can actually exceed copper declines. This growth potential can perhaps dispel fears that weak subscriber growth at other cable companies will spill over to Frontier.
Valuation:
I just realized that my last article on this company was in early October when they signed a deal with AT&T (T) and I did not post an update on this company for Q3 2021 results. I apologize for that. The good news is the numbers were better than I projected when I first wrote up the company in August. I suspect Q4 numbers stand a good chance to surprising to the upside again. Please note the debt and cash numbers below are as of the end of September and do not include the effects of the $1billion bond offering the company completed at the beginning of October of the capital spent on building out the fiber network.
Also, I'm going to be conservative and keep my EBITDA estimate for 2021 largely unchanged despite the fiber subscriber additions. But I am bumping up my 2022 EBITDA estimates up by $25 million simply by assuming the company can add 12,000 net broadband subscribers every quarter and the company can raise monthly ARPU (average revenue per user) 10% year over year like it has recently.
Monthly Broadband ARPU
source Frontier Q3 2021 earnings presentation
Current Valuation
| Market Cap ($28.31/share) | $6.919 billion |
| Debt (Q3 balance) | $7.011 billion |
| Cash (Q3 balance) | $1,211 million |
| Enterprise Value | ~$12.719 billion |
| EV/'21 EBITDA midpoint of $2.45 billion | 5.19x |
| EV/'22 EBITDA (using $2.365 billion) | 5.37x |
If you use my original multiples of 4x 2022 copper EBITDA of $990 million and 8x the higher 2022 fiber EBITDA of $1,375 billion, you get an EV target of $14,960 implying a share price of around $37.50, 32% than today's (January 5th) close.
Risk
The main risks here are the company successfully rolling out fiber broadband to more customers and uptake of that fiber. I think these subscriber additions for Q4 are encouraging, particularly when paired with the Q3 adds. Two quarters don't make a trend but they can start one.
Conclusion
Continue to think that FYBR is one of the more compelling stories in telecom if not the market. I think the ~5x EBITDA multiple does not reflect the company's growth profile or balance sheet strength. Management is showing its ability to manage these assets and expand the offering with good company service. My upside target on the stock, while quite enticing, could ultimately prove conservative.
