Wednesday 29 May 2013

Platinum Communications (CVE:PCS, $0.085)

Platinum Communications is a small internet service provider based out of Alberta. They sell fixed base wireless internet to rural Albertans. There are a number of important qualitative advantages to this business.
  1. High speed internet has become a staple good, people need it
  2. Limited competition in rural areas gives Platinum pricing power.
  3. The government built Alberta Supernet provides fiber backhaul services1
  4. Fixed costs - once a tower is built, adding more users is inexpensive
  5. Cost of capital advantage - most of their competitors are mom and pop operations. This is analogous to the early days of the cable TV industry, and PCS is following a similar roll-up strategy as the Shaw family did decades ago, without the multi-voting stock and egregious insider pay packages.
So, this is a "good" business. It has a bright future, and a good "moat." Customers are unlikely to switch as the installation process is involved, and the cost of building a competing tower makes competitors unlikely to offer service. All that being said, a good business is only a good investment if it trades at a price where you can buy it with a margin of safety.

The current share price of $0.085 gives a market capitalization of $5.5 milion, and their most recent 6 months EBITDA was $826k. Annualizing that EBITDA gives an annual value of $1.65 million. Long term debt net of current assets surplus over current liabilities is $2.0 million, for a total enterprise value of $7.5 million, and an EV/EBITDA of only 4.5x, low for a growing business.

The best way to value this business is by customer accounts. PCS has made numerous acquisitions, and have usually paid $1000 per customer for the customers and the assets to service them. This suggests their 11,000 customer business is worth at least $11M, which corresponds to $0.14 after debt. Platinum is probably worth more than the sum of its acquisitions as it gains scale and can leverage fixed investments and corporate overhead.
Disclosure: Long PCS.

Disclaimer: The content contained in this blog represents only the opinions of its author. I may hold long or short positions in securities mentioned in the blog, and no updates to the disclosure above will be made. I may buy or sell securities at any time. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. Read that last line again. Also, this blog is not a solicitation of business. The content herein is intended solely for the entertainment of the reader and the author



1) http://www.thealbertasupernet.com

Saturday 25 May 2013

Murphy Oil NYSE:MUR $61.58

Murphy Oil is an oil exploration company that is about to spin-off its retail business to shareholders. I'm a huge fan of spinoffs, as I think they often surface value that was hidden in a larger entity. I suspect that will be the case here as the gas stations being spun off are high volume and co-located with Wal-Mart. The E&P business also includes many assets that could be sold off quickly, like a stake in Syncrude. I'm trying to keep this blog focused on Canadian value situations, so I wrote this up on Seeking Alpha at http://seekingalpha.com/article/1461311-the-long-case-for-murphy-oil-corporation.

Disclosure: No position in MUR.

Disclaimer: The content contained in this blog represents only the opinions of its author. I may hold long or short positions in securities mentioned in the blog, and no updates to the disclosure above will be made. I may buy or sell securities at any time. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. Read that last line again. Also, this blog is not a solicitation of business. The content herein is intended solely for the entertainment of the reader and the author

Thursday 23 May 2013

Axia NetMedia TSX:AXX $1.31


Axia is a company in the business of providing next generation networks around the world. Essentially, the own fibre optic cable and allow others to sell network services using that cable. They currently have interests in Alberta, Massachusetts, France, Catalonia, and Singapore. The France and Singapore businesses are owned jointly with others. The best way to value Axia is by the sum of its parts, as each network is a separate business. It would be very easy for Axia to sell one of their networks, as they are separately operated.  

North America

The other reason separate treatment is important is the businesses are very different from a capital intensity and risk perspective. The Alberta business was Axia’s first. The Government of Alberta paid for the construction of a fibre-optic network called the SuperNet, which Axia operates on the government’s behalf. Their business in Massachusetts operates in a similar fashion. These businesses are reported together as the North American segment.  North America had segment income of $4.375 million in the last quarter, after depreciation of $725 thousand was accounted for. Most of the value of this segment comes from Alberta, and Axia’s contract to run this network expires in 2 years unless renewed. The present value of my estimate for Axia’s income from the SuperNet before contract expiry is $38 million. Massachusetts and any upside from an Alberta renewal are not valued separately, but could be significant. The Massachusetts network spend is minimal, so any value to that business is upside, and a renewal in Alberta would be a huge catalyst, as it could add up to $120 million in value if the terms are similar. Management is guiding towards completion of the MA network in Q3 2013 (Q1 conference call)

Europe

Axia put in $80 million for half of a $280 million base. Cube paid 42+50mm in earnouts for their half. Covage has $30 million in debt and $28.8 million in cash (inferred from Jan 2013 corporate presentation on changes due to IFRS consolidation). Covage as a whole had 3.355 million of EBITDA in the last quarter. That was a big improvement over the past, as the operating leverage in the business begins to show. If we annualize that we get $13.5 million. Cube paid a minimum of $42 million for their half of the business, and that valuation for Axia’s half of a business doing $13.5 million of EBITDA is very conservative.

Singapore

Axia also owns 30% of Singapore’s OpenNet, a fibre to the premises network that was mostly paid for by the Government of Singapore. That business had operating income of $10.5 million in the most recent quarter, with penetration of only 30%. Because the fibre product is dramatically superior to other networks, and 8 companies are selling it on their behalf (including the incumbents), penetration is expected to be very high, and has been growing dramatically. Starting in April 2013, OpenNet will need to pay the greater of 75% of its revenue or $55 million per year to a SingTel subsidiary for use of its infrastructure (network rooms, manholes, ducts, etc). Last quarter’s revenue would annualize to a yearly rate of ~$60 million dollars. At present, functionally all the value of OpenNet is going to SingTel’s Assetco. However, OpenNet should easily be able to double their penetration within the next two years, which doubles their revenue because their rates are regulated. At that level of revenue two years out, they’d have $120 million in revenue, $90 million to AssetCo, and $10 million of other expenses. The $6 million per year of those earnings attributable to AXX are worth at least $18 million. Another way of looking at that is as an option on OpenNet improvement, and a very cheap one at that, since OpenNet revenue could approach $180 million if penetration increases sufficiently.

Sum of the part and net Debt

The company is has around $10 million of net debt, and taking that off the sum of the Alberta, French and Singapore businesses leaves a valuation for Axia of $88 million, which is identical to its current market cap. Those three businesses when very conservatively valued account for the entire market value of the company. Thus, all the upside is free. The potential catalysts of a SuperNet renewal, more than 50% of Singaporeans signing up for the best and cheapest internet available to them, or Covage margins increasing are all present, possible, and not accounted for in the current price. This also doesn’t include any value for the Massachusetts or Spanish networks.  It’s also possible that Bell Canada decides to buyout Axia. They own a network that works with Axia’s in Alberta, and already own 5 million shares. A dividend initiation is also on tap for the next two years, which would likely provide a material rerate to Axia’s multiple. Axia also bought back approximately 1.4% of the company last year, which improves EPS going forward. Essentially, Axia is a good business trading at a price that discounts the worst case scenario for all of it's assets. That valuation provides significant downside protection, and a huge upside bias to future moves.
 
Disclosure: Long AXX

Disclaimer: The content contained in this blog represents only the opinions of its author. I may hold long or short positions in securities mentioned in the blog, and no updates to the disclosure above will be made. I may buy or sell securities at any time. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. Read that last line again. Also, this blog is not a solicitation of business. The content herein is intended solely for the entertainment of the reader and the author

Wednesday 22 May 2013

America's Car-Mart NASDAQ:CRMT $46.81

America's Car-Mart is a great growth business trading at a great value price. It has the aspects an intelligent investor looks for: a good business with a good return on equity, a competitive advantage, room to grow, and a great valuation. Since this is an American company it's a bit out of the scope for my blog, but I did a write-up on Seeking Alpha that covers it in more detail.

Disclosure: Long CRMT

Thursday 16 May 2013

Indigo Books & Music TSX:IDG $10.79

Indigo Books & Music Ltd is the largest (and only significant) chain of bookstores in Canada. It operates a variety of small and large format stores under a number of brands, and the business has been profitable and cash flow positive. It also had a stake in Kobo, an e-reader device company, which competes with Nook and Kindle. Management sold the Kobo business for $315 million, or approximately $145 million for Indigo’s share.

The company has had same store sales declines of ~5%, but margins have been improving as management changes the assortment to include higher margin gift items, housewares, and greeting cards.

The real item of interest here is the company’s cash position. Their most recent balance sheet showed cash of $314 million and total current assets of $588 million. Inventories and accounts payable of $269 million offset payables of $272 million. Inventory risk is not significant as books are typically returnable to the publishers by the stores if they don't sell, an odd quirk of the business.

The only other liability of any significance on the balance sheet is $77 million of unredeemed gift cards and deferred revenue. This float is valuable in a Zero Interest Rate Policy world, and inevitably some will not be redeemed. To be conservative, if we deduct the entire amount from cash $237 million of net cash remains.

This leaves an enterprise value of $36 million for a company with revenues of over $900 million in the last 12 months, and where profits are improving dramatically. The first three months of fiscal 2013 (most recent financials) show continuing operations earning $12.5 million, compared to a loss from continuing operations in the comparable period a year earlier of $17 million. The bottom line improvement is even more dramatic as the Kobo business was a consistent money loser, so its disposition removes a significant earnings drag.

Indigo also pays a $0.11 quarterly dividend, so there’s a bit of a ‘paid to wait’ quality to this idea. There is also the potential catalyst of an activist becoming involved. Canada has much weaker "poison pill" rules than the US, and US activists have been agitating for change at numerous Canadian companies. It seems probably that at the current price someone will "forcefully request" the cash in the business be distributed.



Disclosure: No position at time of post

Disclaimer: The content contained in this blog represents only the opinions of its author. I may hold long or short positions in securities mentioned in the blog, and no updates to the disclosure above will be made. I may buy or sell securities at any time. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. Read that last line again. Also, this blog is not a solicitation of business. The content herein is intended solely for the entertainment of the reader and the author

Wednesday 15 May 2013

Automodular Update TSX:AM $1.31

Automodular announced today that Ford is insourcing the work and will not renew their contract post 2014. This is the downside case in my original post, and I'm not very excited my first stock cratered right after I started the blog. I didn't have a position at that time, but have bought today after the large drop, since the company now has $27.7 million in cash. Their other current assets are $13.7 million, which exceeds total liabilities of $7.0 million by a margin comfortable enough that it should cover wind up expenses. They should also make ~3-4 million per quarter until the end of 2014. At a current market cap of $26 million, I believe there is now a sufficient margin of safety here, as cash exceeds the market cap and cash generation should be strong until the end of the contract. Management has proven to be shareholder friendly in the past, and I believe they will liquidate promptly if they don't source replacement business soon.

Disclosure: Long AM.

Disclaimer: The content contained in this blog represents only the opinions of its author. I may hold long or short positions in securities mentioned in the blog, and no updates to the disclosure above will be made. I may buy or sell securities at any time. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. Read that last line again. Also, this blog is not a solicitation of business. The content herein is intended solely for the entertainment of the reader and the author

Wednesday 8 May 2013

Arrowhead Water Products Ltd. CVE:AWA $0.015

Arrowhead Water Products Ltd (AWA) is a micro-cap company which recently sold its active business and all of its assets to the Ice River Springs Water Company. This will result in a company that holds only cash as an asset. The company has indicated they intend to pursue other business, so you're depending on their ability to merge their company with another or acquire assets at a fair price. However, their current market cap of $217,000 (I said it was a micro-cap) is substantially less than expected amount of cash they'll have after all payments relating to the sale are received. Their last MD&A indicated net cash proceeds of $750,000 after accounting for liabilities associated with the sale. That cash and their listing on the TSX-V exchange should make them an attractive way of going public for a small private company, as IPO markets are basically shut down right now for junior companies in Canada. Thus, they have both cash value and scarcity value. I expect a share consolidation and merger with a private company within the year. This is definitely a situation where a limit order should be used, as the stock is extremely illiquid.

Disclosure: No position at time of post.

Disclaimer: The content contained in this blog represents only the opinions of its author. I may hold long or short positions in securities mentioned in the blog, and no updates to the disclosure above will be made. I may buy or sell securities at any time. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. Read that last line again. Also, this blog is not a solicitation of business. The content herein is intended solely for the entertainment of the reader and the author

Saturday 4 May 2013

Southern Pacific Debentures TSX:STP.DB $69.50

Southern Pacific (STP) is a small company dedicated to developing oil resources using Steam Assisted Gravity Drainage (SAGD). It first came to my attention when it bought the Senlac project from EnCana in 2009 for $89 million. I came across the news release as I had an interest in EnCana, and the price they sold the asset for decreased my interest in EnCana. I realized if the price was a bad sell for EnCana, it was probably a good buy for STP. I bought the shares at that time, and have done well on them, but this write-up is about a debt security. STP did get a good buy in Senlac, as a recent investor presentation1 indicated they have taken out $180 million in funds from operations since that time. The asset is producing $56 million of operating income with $20 million of capital a year, which makes the purchase price a great bargain. 

However, Senlac is the smaller part of the company. It produced approximately 3,300 boe per day of oil in 2012, compared to a nameplate capacity of 12,000 boe per day for their newly started Mackay project in Alberta.

The market has severely punished STP for the start-up of the Mackay project, which has been slower than expectations. The first well came on SAGD in Q4 2012, and recently announced production was only 1,400 barrels per day. Management expects the full capacity to be reached over 18 months, a position the market seems to doubt. STP also owns other undeveloped land that is highly prospective for oilsands production.

The company issued $172.5 million of convertible debentures, along with $260 million of long term debt to fund the construction of the Mackay project. Net of cash and working capital, they had approximately $385 million of debt at the end of 2012. Interest charges on the second lien debt are $22.75 million per year, and interest charges on the convertible debentures are $10.35 million. STP also has a first lien revolver, which has a 4.25% interest rate and a $75 million dollar maximum. This would have a maximum payment of $3.19 million. This gives a total maximum interest payments for 2013 of $36.28 million. That happens to be almost exactly my conservative forecast of free cash flow from the Senlac project. So whether STP does manage to get Mackay up and running or not, they should be able to make the payments on their debt. For additional safety, the convertibles I am discussing here mature in 2016, before the second lien debt in 2018.

So, STP will be able to make good on their obligations, but I hear you out there asking, “So what?“ STP.DB is currently trading at $69.50 per hundred dollars of par value, for a yield to maturity of over 19%. This large discount to par provides a margin of safety to STP.DB if my cashflow estimates are wrong or something unforeseen happens. It also provides the possibility for a large return if events unfold as expected. If the Mackay project does work out, the debentures are convertible into STP stock at $2.10, for additional potential upside. (The NAV of their reserves is around $5, so the upside is real). Those looking for a purer speculative upside could buy the shares directly at around $0.70, but the debentures provide a mix of safety and value I find irresistible.

Disclosure: Long position in Southern Pacific securities.

Disclaimer: The content contained in this blog represents only the opinions of its author. I may hold long or short positions in securities mentioned in the blog, and no updates to the disclosure above will be made. I may buy or sell securities at any time. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. Read that last line again. Also, this blog is not a solicitation of business. The content herein is intended solely for the entertainment of the reader and the author.