BAHN - Bahnhof (Aktietorget)

[NewbieD]

200 million USD market cap, but listed on a an unregulated list in Sweden, Aktietorget. Reason is partly to save cost (they have strong cost focus) and partly that they host the servers of Aktietorget.

 

Formatted Google Docs:

https://docs.google.com/document/d/1liFRqehiBF8cBT9CsEXxSkDT3f-Ths7NQwr859cRThY/pub

 

Bahnhof

by David K

 

Summary investment thesis

The company provides internet service and hosting to customers in Sweden and Norway. They are experts in routing, data center construction and security. High profile on integrity and protecting customers data.

The company is cheaply priced due to

- Listing on illquid stock list

- Too low estimates on growth

- Hidden value in new data center (see offering memorandum, english summary)

Catalysts

- New data center (by far the biggest)

- Move to Nasdaq OMX Mid Cap. Market cap is outgrowing current list.

- Cost reductions from Tyfon integration.

 

Company overview

Bahnhof internet AB is one of the oldest swedish ISPs, dating back to 1994.

The company has had stable and profitable growth due to

High quality of service

Expertise in building data centers

Guerilla marketing activities by the CEO, Jon Karlung

Strong integrity message and standing up for customer rights

 

The company currently has about 200 000 private internet subscribers, growing organically at a rate of about 17%/year t. The network is entirely fiber-based. They are the largest provider in open fiber networks in Sweden, where customers can freely choose their provider.

 

Bahnhof has a sizable B2B business as well, providing almost 45% of revenues. The majority of this is providing internet access and telecom services. But the fastest growing part is managed hosting and cloud services in centrally located data centers in Stockholm and Malmö.

 

Bahnhof owns 80% of Elementica, www.elementica.se. Post-money in the offering it will just over 70%. The short story of this data center is that it will be connected to the remote heating system in Stockholm, one of the most extensive ones in major cities. Through this connection they are able to sell the heat generated by the servers and are thus able to offer customers a much reduced price level for the energy their servers use. The electricity cost can range from 25% to 35% of the total cost of hosting in a data center. With Elementica this part of the cost will go down to between 1/3rd and half of competitors. The customers can also brag that they are using ‘green energy’. Apart from the energy cost, the cooling facilities means the data center itself can be built in a compact way, and that price will be a bit cheaper for the same number of server racks as they would at competitors.

 

There is currently a private placement of 22 MSEK (2.5 MEUR) to finance the data center, at a post-money valuation of 242 MSEK. The plan for the money is to use it to hire international consultants and attract some major international customers. They will need to sell 25% of the space to obtain financing and start the building. The offering ends 4th of December and Bahnhof owners has priority. The company itself estimates that similar data centers (21 MW) have a market value just north of 3000 MSEK. They believe this one will have a somewhat higher value due to the cheaper energy they are able to offer by selling the heat generated.

 

What is the likelihood of the plans panning out? In my estimate the green stamp is very much in demand from the private and, especially, the public sector. The economic incentive seems big enough to be a clear competitive advantage. Combined with the proven track record they have in smaller data center construction. I think they will be able to sell the needed volume. One additional driver can be the legislation that forces companies not to send personal data to the US. This will increase the need for local servers.

 

Ownership

Just over 50% of the shares in Bahnhof is held by Jon Karlung and Andreas Norman, who’s had control over the company for almost all of it’s history.

 

Some institutional shareholders entered during 2014/2015, including investment company Öresund and a value small cap fund.

 

Valuation

Hurdle rate

The base business is a fairly predictable business. I will use a discount rate of 9%.

Bear case

8% yearly growth. Operating margins decline to 11%.

 

Base case

Growth will decline with 1%/year to 8% in 2023. Able to keep current operating margins of 12.5%.

Bull case

Able to keep similar growth rates to past 5 years with 17%/year. Probably needs an aquisition or two similar to the Tyfon aquisition this year to happen. Operating margin expands to 14% due to economies of scale. I.e. custom service operations don’t need to be scaled up, can have higher usage rates of existing connections and hardware.

 

Elementica

Scenario analysis (total failure 30%, 100% rented 50%, 80% rented 20%) estimates the total NPV to about 600 MSEK.

 

Spread sheet: https://docs.google.com/spreadsheets/d/1uKnt5BtV0NsayvJS1KCEh7ToMKthZyKeYhAIP3QugKE/pubhtml

 

Total weighted valuation: 230 SEK/share.

 

Risks

The current operations in Bahnhof is a utility like business with underlying growth. Since the network is entirely fiber based there is little risk of upgraders churn near term. Possible disruptors might come long term from new technologies (wireless?). Don’t see any structural changes or major new competitors short term (3-5 years).

 

For Elementica the risk is high that it will fail, most likely in the initial customer attraction phase. Some chance there will be financing problems that decrease return, maybe in connection with a general credit contraction. I guesstimate 30% chance of a complete failure.

 

The company has an aggressive stance for integrity and privacy. So far this has worked out for them, and been one of their sources of customer satisfaction. There is a risk that they step over the line and will have problems on this front.

 

Conclusion

The existing business is a close to fairly valued compounder that can continue to grow for a long time. The new data center should add vaue of more than the current market cap within 5 years if it succeeds.

 

Getting shares in the data center offering is not likely unless one holds shares in Bahnhof itself. If holding Bahnhof shares the offering should be subscribed.

 

[alwaysinvert]

This was my biggest position for years, but I sadly sold at 40-50 while the company actually was decently cheap still multiple-wise. What I didn't realize then was that they had amazing pricing power in the HFT space due to their geographical proximity to the OMX. They never actually said this out loud but in hindsight the clues were there. 

 

Operatively they are amazing and have by far the best reputation of any ISP in the country. This will however  have to be actively managed with good customer service and such to avoid spikes in churn, because the "open networks" in fiber actually have a working competitive market. Something I really do question is the decision of paying off all bank debt, which seems extremely suboptimal in a business with such cashflows.

 

I have met the management and spoken to Karlung a couple of times on the phone (even if it was a few years ago now) and he strikes me as very good on operations, charismatic and media savvy, a true entrepeneur, but not really an active strategic thinker on capital allocation. Maybe he does think about these things more than my impression was, but he was not willing to share these thought processes. I'm not sure, but that's my take. I think paying all their debt off bears out this view, however.

 

In addition I would like to say that I have had some issues with their reporting. Not properly breaking out different business areas and being somewhat obscure on some accounting stuff. It might have gotten better, and I'm sure some of this is a decision on business grounds.   

 

After reading Elementica's prospectus I'm not enticed in the slightest. Early stage of an experimental and extremely capital intensive business is something I leave to others to gamble on. Even if I wouldn't be surprised to see it succeed, that is not my ball game.

[NewbieD]

Thanks for sharing. I guess you exited about the time I entered. Some new info to me about the HFT. That business should have dried up a bit recently?

 

Your take on Karlung's thinking and allocation skills is pretty close to my views. The decision to operate with little debt is something that keeps popping up in many companies I like with a clear majority owner who's been there from the start. If permanent it will be supoptimal. I like it at this (perceived) phase of the cycle. What might look overly cautious could be a patient predator looking to gobble up a competitor or two with more debt when the tide turns out. I'm not patient enough to sit in cash, but console myself that I sit in stocks with little or no debt.

 

Elementica. Yes, a gamble, with a potential for permanent loss of capital. I had to value it to come up with a value for Bahnhof itself. The risk reward looks good enough for me. If they succeed they should have a natural moat through the expensive land right next to the new heating plant. That they were able to obtain this on the cheap shows the goodwill from the city planning.

 

Been thinking about why they do an offering at all when the sum is really something they can easily finance themselves. Can't really come up with a good enough answer.  One option is they want the right type of shareholders for the venture, and not force Bahnhofs shareholders to back it. It could also be that they see this as en efficient way to incentivize their top lieutenants to work hard. Haven't seen this setup for an offering before.

[whistlerbumps]

Does the company have English financials anywhere?  Couldn't find them on AktieTorget and couldn't find an IR website on the Bahnhof page.

[NewbieD]

Two more quarters have passed with no surprises. Valuation gap has pretty much closed (5% left to my guess) so this is now a long-term play on a stable growth company with a fair valuation IMO.