Atlantic Tele-Network’s Valuation Ignores Profitable and Growing Segments – ATNI

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Atlantic Tele-Network owns a diverse collection of wireless and wireline telecom assets in the rural US and the Caribbean. The company’s insiders are large shareholders and have an excellent track record of growing book value and dividends. ATN recently closed on the sale of a major segment to AT&T, receiving nearly triple what ATN paid for the business only three years ago. Post the transaction, Atlantic Tele-Network is debt-free with a large cash hoard and profitable remaining operations, the values of which exceed the company’s enterprise value.

Founded in 1987, ATN got its start providing telecom services in the South American nation of Guyana and the US Virgin Islands. From there, the company expanded to Bermuda and other Caribbean Islands, and into the US, focusing on rural markets with little competition from large telecom providers. Along the way, ATN grew its revenues and operating income from $117.6 million and $18.1 million in 1997 to $741.4 million and $99.5 million in 2012. Shareholders were richly rewarded from this growth. From the end of 1997 to the end of 2013, Atlantic Tele-Network stock returned an astounding 23.8% annually. The largest beneficiaries of this value creation were the father and son team that runs ATN, Cornelius B. Prior and Michael T. Prior. Together, and including trusts for their benefit, these men own 36.88% of ATN’s stock, worth some $359 million. Michael T. Prior has taken over the leadership role from his elderly father, and his large ownership stake aligns his interests with those of shareholders.

Atlantic Tele-Network holds itself out as a nimble investor, willing to sell a division when the time is right and to go all in on the right opportunity. A shining example of that is the company’s recent Alltel transaction. As part of Verizon Wireless’s acquisition of Alltel in 2008, Verizon was required to divest certain parts of Alltel’s network. In 2010, ATN snapped up Alltel’s operations in Idaho, Ohio, Georgia, Illinois and the Carolinas. ATN paid $200 million for Alltel, funding the purchase entirely with debt. Only three years later, ATN announced the sale of Alltel to AT&T for $780 million, plus a small working capital adjustment. For the price of a few years’ interest payments, ATN created $580 million in value for its shareholders, pre-tax. The sale of Alltel closed in September 2013.

Atlantic Tele-Network used the proceeds of the Alltel transaction to eliminate all its debt. After paying taxes on the transaction and making a distribution to minority shareholders in Alltel, the company has net cash of $389 million, of which $79 million is escrowed for up to 18 months. ATN’s market capitalization is $973.6 million, yielding an enterprise value of $584.2 million.

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Atlantic Tele-Network’s enterprise value is far below the fair value of its remaining subsidiary businesses. While a full survey of each of these would run thousands of words, I’ll do my best to summarize them for this blog post. There are four major segments, which I’ll tackle in order of descending revenues.

US Wireless Operations

ATN’s subsidiary, Commnet, provides cellular services to remote areas across the West, from the plains to the Rockies. Commnet’s assets include 579 cellular base stations across the region. Though Commnet brings in much less revenue than the divested Alltel, Commnet enjoys much higher profitability. For the first nine months of 2013, Commnet’s EBITDA margin was 65.3%, practically unheard of for a cellular operator. This EBITDA margin speaks to how little competition Commnet faces in its remote markets. Commnet is also experiencing good growth, with revenues for the third quarter of 2013 up 12.9% over the previous year. Much of the rise is due to increasing data traffic on the network. ATN is in the process of upgrading much of Commnet’s network from 2G to 3G standards, which will increase data throughput. (However, the company warns that some of the increased data revenues will be offset by planned reductions in data transfer prices.)

For the first nine months of 2013, Commnet earned $52.59 million in EBITDA, putting the segment on pace to hit $70.12 million for 2013. The simplest means of valuing the segment is to apply the same multiple of EBITDA as ATN received for its sale of Alltel, also a rural wireless provider. (With its soaring data throughput and extraordinary margins, Commnet may be worth quite a bit more, but it always pays to err toward the conservative side.) AT&T’s purchase of Alltel was done at 7.70x annualized trailing EBITDA, which implies a valuation of $539.93 million for Commnet. Increasing or decreasing the valuation by one turn of EBITDA expands that range to $469.81 million to $610.05 million.

International Integrated Telephony

ATN’s second largest segment is its Guyana telecom provider, GT&T, which enjoys exclusivity on long-distance calling in Guyana. GT&T also offers wireless and internet services. Atlantic Tele-Network owns 80% of GT&T, with the rest formerly owned by the government of Guyana and now by a third party. GT&T’s revenues and earnings have generally experienced modest declines in recent years, with trailing twelve months revenues down 7.9% since 2008 and EBIT down 17.4%. GT&T’s results are also threatened by new legislation in Guyana’s parliament, which may strip GT&T of its monopoly on long-distance telephone service in Guyana. Atlantic Tele-Network states that it hopes some of the lost business due to regulatory changes would be made up in increased local calling activity.

GT&T produced $43.84 million in EBITDA for the trailing twelve months, of which $35.07 million is attributable to ATN. Given the long-term decline in revenue and earnings and the regulatory uncertainty, GT&T warrants a low valuation. Assigning an EBITDA multiple of 4.0x trailing results implies a value of $140.29 million. Expanding that range to 3.0x-5.0x EBITDA gives a range of $105.22 million to $175.36 million.

Island Wireless

ATN’s third largest segment is Island Wireless. Through various subsidiaries, Atlantic Tele-Network provides cellular service to several Caribbean islands, including Bermuda, Turks & Caicos, the US Virgin Islands and others. The Island Wireless segment has shown strong revenue growth, expanding 188% from 2008 to the twelve months ended September 30, 2013. The most recent quarter’s revenues were up 11.6% over the previous year. As it has grown, Island Wireless has reached the point where additional revenues drop nearly unimpeded to EBIT. As revenues increased by $15.05 million from 2011 to the trailing twelve months, EBIT increased by $14.44 million. The segment’s EBITDA and EBIT margins continue to expand, reaching 22.1% and 6.5% on a trailing basis. For the most recently reported quarter, the segment’s EBITDA margin reached 33.5%. In the last quarter’s earnings call, management indicated this level of profitability is “somewhat sustainable.” Assuming a sustainable EBITDA margin midway between the most recent quarter and the twelve trailing months, or 27.8%, Island Wireless can produce annual EBITDA of  $18.40 million, based on the twelve trailing months’ revenues. Given that Island Wireless is still growing at a healthy pace and enjoying positive operating leverage as it does so, the segment warrants a valuation above those of the company’s other businesses. Valuing Island Wireless at 9.0x trailing normalized EBITDA yields a valuation of $165.58 million. Expanding that range to 8.0x-10.0x trailing EBITDA widens the valuation band to $147.18 million to $183.97 million.

US Wireline

Finally, ATN owns wireline assets in the US Northeast, operating as Sovernet Communications. These operations are currently only minimally profitable, producing trailing EBITDA of $2.98 million and trailing EBIT of negative $1.61 million. However, ATN is close to completing a fiber optic network in Sovernet’s service area, which will increase the segment’s capabilities and revenues. It is difficult to assess the impact of the expansion on revenues and earning, so I choose to estimate the US Wireline segment’s value as the book value of its assets instead. As of September 30, 2013, the segment had assets with a book value of $43.86 million, up $12.97 million from the previous year-end on strong capital investment.

Aggregate Valuation

The combined value of Atlantic Tele-Networks’ various operating subsidiaries and excess cash is substantially higher than its current trading price, even using the conservative end of already conservative projections. The EBITDA multiple ranges I used to value the various segments are typical of low or no-growth companies, when the company’s large US wireless and Island Wireless segments are still experiencing strong revenue increases.

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Using even the most conservative valuation multiples, Atlantic Tele-Network stock is worth nearly 20% more than its current trading prices. Extra value could be created if management finds another bargain like Alltel, or can successfully introduce high-margin products into its existing markets. Atlantic Tele-Network’s downside is limited by its strong cash position and the defensive nature of the telecom industry.

Alluvial Capital Managment, LLC holds shares of Atlantic Tele-Network, Inc.  for client accounts.

OTCAdventures.com is an Alluvial Capital Management, LLC publication. For information on Alluvial’s managed accounts, please see alluvialcapital.com.

Alluvial Capital Management, LLC may buy or sell securities mentioned on this blog for client accounts or for the accounts of principals. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at info@alluvialcapital.com.

Spectrum’s Spin-Off and Reverse Split Creates Opportunity – SPGZ

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Spectrum Group International is undertaking a complicated spin-off/deregistering transaction. Spectrum will first spin off A-Mark Precious Metals, its consistently profitable precious metals trading business, separating that good business from Spectrum’s smaller and loss-making collectibles business. Shareholders will receive 1 share of A-Mark for every 4 shares of Spectrum they currently hold. Immediately following the spin-off, Spectrum will execute a 1 share for 1,000 shares reverse split, reducing the number of shareholders in the remaining collectibles business below 300 and ending the company’s financial reporting obligations. Fractional shares resulting from the reverse split will be cashed out at $0.65 per pre-split share.

In my opinion, the market has failed to accurately price Spectrum’s shares for the value that will be delivered to shareholders as a result of the transaction. This is a classic scenario in which a company’s earnings power will no longer be obscured by a struggling segment, potentially leading to appreciation once the albatross has been removed.

First, a brief overview of Spectrum’s existing operations is due. Spectrum is a dealer of precious metals, including bullion and coins. While I believe the investment value of such items is dubious at best (and I think I am in good company), many seem to disagree and gold, silver and platinum coins and bullion are in demand world-wide. Spectrum serves as middleman between buyers and sellers of these items and also provides secured loans to precious metals collectors, dealers and investors. Spectrum’s collectibles division deals in rare and antique coins and wines. It must be noted that Spectrum is not a precious metals speculator, and does not attempt to profit by trading precious metals futures or physical metals. Spectrum profits regardless of metals prices, simply earning a spread on transactions.

Spectrum has been consistently profitable, though its profits have ranged widely in recent years. On average, Spectrum earns the majority of its pre-tax income through its lending operations. The historical results shown below are adjusted for one-time items like goodwill write-offs and litigation expenses.

SPGZ historicals

Spectrum’s consolidated historical results tell only part of the story. In reality, Spectrum’s strong A-Mark business has been subsidizing heavy losses from the collectibles business. The figures shown below are adapted from the company’s proxy statement dated February 7.

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The collectibles business accounted for 38.7% of Spectrum’s total gross profits for the twelve trailing months, but a whopping 68.3% of operating expenses. The segment’s adjusted pre-tax net loss has exceeded the entire company’s adjusted pre-tax income since at least fiscal 2012.

Clearly, Spectrum’s reported profits would look much better if the collectibles division’s losses were excluded. And that’s exactly what will happen once shareholders receive shares in A-Mark, the precious metals trading business. Spectrum has provided pro forma historical earnings data for the A-Mark business alone.

Pro Forma A-Mark

 

For each share of Spectrum currently held, shareholders will receive 0.25 shares in A-Mark. The implied look-through A-Mark EPS per share of Spectrum is $0.42. At Spectrum’s current share price of around $2.60, the implied valuation of A-Mark is extremely conservative, especially when the value of the remaining business is taken into account.

The situation is best for smaller Spectrum shareholders who own fewer than 1,000 shares. The $0.65 in cash per share they will receive from the reverse split brings the current share price to $1.95, which values A-Mark Precious Metals at only 4.6x trailing earnings. Holders of more than 1,000 shares face the conundrum of projecting the value of the remaining collectibles business, since their shares will not be cashed out in the reverse split. Conservatively valuing those shares at 30 cents each, less than half of the reverse split valuation, Spectrum’s current share price values A-Mark at 5.5x trailing earnings. Disregarding the value of the collectibles business altogether still values A-Mark at only 6.2x trailing earnings.

The tables below show the current value of Spectrum’s shares at various A-Mark P/E ratios for both large and small shareholders.

Valuations

 

At a very reasonable 8.0x multiple of A-Mark’s trailing earnings, Spectrum’s current value per share is $4.01 for small shareholders and $3.66 per share for larger shareholders. Either of these prices represents a large premium over today’s price of around $2.60. Purchasers at the current price have a good chance of realizing appreciation once Spectrum’s losing collectibles business is separated and A-Mark’s earnings power becomes apparent.

Alluvial Capital Managment, LLC holds shares of Spectrum Group International for client accounts.

OTCAdventures.com is an Alluvial Capital Management, LLC publication. For information on Alluvial’s managed accounts, please see alluvialcapital.com.

Alluvial Capital Management, LLC may buy or sell securities mentioned on this blog for client accounts or for the accounts of principals. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at info@alluvialcapital.com.

Kreisler Manufacturing – KRSL

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Today’s idea is very simple. Kreisler Manufacturing is a profitable, cash generating manufacturer with an over-capitalized balance sheet. Kreisler’s market perception suffers from the results of some poor decision-making a few years back, but the company has fully recovered from its mistakes. Once the market recognizes Kreisler’s restored earnings power and excess assets, the company’s market price may rise to reflect its value.

Kreisler Manufacturing provides pipe and tube assemblies and manifolds for aerospace and industrial turbine applications. The company is based in New Jersey and has been in business since 1968. Throughout the late 90s and into the mid-2000s, Kreisler’s business was plagued with low margins and the company posted continual losses. However, Kreisler’s fortunes would change. From 2005 to 2008, Kreisler’s revenues rose 103%, gross margins nearly quintupled and net income climbed from near break-even to just under $2 million in 2007 and 2008. Cash piled up, accounting for 36% of assets in 2008 against nearly no debt and leases.

Things were looking bright for Kreisler, but then two things happened. One, the financial crisis came along and crimped revenues and margins. Revenue slumped 19% between and 2008 and 2010, but gross profits cratered, falling 77%. (It seems likely that Kreisler bid for projects at razor-thin margins just to keep its factory running and its workers employed.) However, despite the difficulties posed by the severe recession, Kreisler’s worst wound was self-inflicted. In 2010, Kreisler decided to set up a manufacturing facility in Poland. Kreisler invested millions in the venture. The Polish government also kicked in multiple millions in grants to encourage the development. The project was a disaster. Despite spending millions on facilities and equipment, the Polish subsidiary produced only endless operating losses, crushing Kreisler’s profits from 2010 on.

Kreisler finally pulled the plug on the boondoggle in 2012, selling the entire subsidiary for a pittance. (Literally less than you likely have in your wallet at the moment.) Kreisler wrote down the subsidiary’s entire value and also off-loaded some liabilities in the process. The resulting loss pushed the company’s reported net income to negative $2.8 million in 2012. Yet, this large reported loss disguised a strong recovery at Kreisler’s domestic operations. Despite reporting the $2.8 million loss in 2012, the company’s continuing operations actually earned $2.34 million in 2012.

Since writing off its Polish operations and re-focusing on the domestic business, Kreisler has thrived. Gross margins have rebounded to around 15%, while operating margins are hovering around 10%. Revenues have fallen off slightly since 2012, but the company has been able to maintain its margins, protecting profitability.

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Most significantly, Kreisler’ has produced serious cash flow since the exit from Poland. Some of this cash flow was due to one-time items like a large tax refund, but the greater credit is due to better working capital management. Kreisler’s inventory levels are sitting at 47 days of trailing sales, compared to a high of 108 days of trailing sales in 2010. Due to the improved operating results and strong cash flow, Kreisler’s balance sheet has never been stronger.

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Of Kreisler’s $9.19 million in cash and short-term assets, at least $7 million is likely excess. Kreisler could distribute or otherwise spend down $7.36 million in cash before its current ratio hit 2.50, still a very healthy buffer.

At Kreisler’s current share price, the market is largely ignoring this surplus cash. Kreisler appears to trade at 11.1x trailing earnings, but the company really trades at only 6.9x earnings once excess cash is netted out. The company also looks very cheap on  EV/EBITDA and EV/EBIT, coming in at 4.2x and 4.5x respectively.

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Though Kreisler looks very cheap on a trailing earnings basis, two questions remain.

1. Will Kreisler’s earnings hold up? Defense contractors account for a large portion of the company’s revenues, and a reduction in defense spending could reduce demand for the company’s pipes, tubes, and turbines. With the US backing off from more than a decade of war footing and with every budget item drawing close scrutiny, the possibility of reduced demand is real.

2. What will Kreisler do with its excess cash? That cash is only worth face value or more if it is used productively for the benefit of shareholders. If the cash is squandered in poor investments or simply allowed to languish on the balance sheet forever, returns to shareholders will be reduced. Kreisler seems to have gotten the message about blowing capital on risky foreign ventures. The company paid a 50 cent special dividend at the end of 2013. There’s a lot of cash left to use before we can conclude it’s been allocated effectively, but the chances of another massive and ultimately failed expansion seem low.

In my view, the risks of declining revenues and poor use of the company’s cash are outweighed by the extremely low valuation and strong balance sheet.

 

No position.

OTCAdventures.com is an Alluvial Capital Management, LLC publication. For information on Alluvial’s managed accounts, please see alluvialcapital.com.

Alluvial Capital Management, LLC may buy or sell securities mentioned on this blog for client accounts or for the accounts of principals. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at info@alluvialcapital.com.