ALSK - Alaska Communications

[tombgrt]

http://seekingalpha.com/article/1598382-alaska-communications-the-finest-telecom-turnaround-of-the-past-decade?source=google_news

[blainehodder]

...So it still looks like a 50 cent dollar at 3.20 to me, given the updated guidance.  Anyone adding at this level? 

 

Thanks again Packer!

[Phaceliacapital]

If only each of our investments worked out this well :D

[tombgrt]

Cash interest expense which was $18.3 million for the first half will be lower in the second half, because of continued debt reductions and the unwinding of 50% of our interest rate swaps and is targeted to be about $35 million for the full year 2013. Free cash flow is expected to be between $20 million and $25 million and we’re targeting net debt to be between $420 million and $430 million by the end of the year. That’s guidance for 2013.

 

Turning to page 21, we’d like to provide a directional view beyond this transition year 2013. We call it our first full year. As I said earlier, we have many moving parts in our business and once we close out this year we’ll provide guidance for what would then be 2014, in the interim because of the transformative nature that AWN has to our financial profile we’d like to provide a view point of our go forward results.

 

As you can see, we are optimistic about our prospects and believe we can lead our industry in broadband revenue growth. From an adjusted EBITDA perspective we’re targeting $90 million. Our capital program is targeted to be around $45 million and contemplates continue to fiber-to-the-node investments. We need to invest a growth, but will be prudent and make sure our continue capital program generates returns for our shareholders. Interest expense will come down significantly from the $35 million level in 2013 and we anticipate it being approximately $31 million. We’ll continue to use our free cash flow to reduce debt. Our goal is to achieve 3.5 times net debt leverage ratio.

 

Under this directional view, we’ll have about $410 million of net debt and be at approximately 4.5 times leverage. We’ll move this leverage ratio down as we pay-down debt and grow adjusted EBITDA. As an example of how quickly we can do this if we improve our EBITDA performance by $2 million or about 2% our leverage ratio moves down to 4.4 times. We’re committed to this type of dynamic.

 

http://seekingalpha.com/article/1597402-alaska-communications-systems-groups-ceo-discusses-q2-2013-results-earnings-call-transcript?page=5

 

They are certainly doing a great job! I find Mr Market's reaction weak but maybe it will take some time before all is recognized. Imo they are in a great position atm.

[LC]

*slams forehead on table*

[hyten1]

Damn I wish I bought a lot more :(

[mysticdrew]

Damn I wish I bought a lot more :(

 

Don't we all...

[fareastwarriors]

Damn I wish I bought a lot more :(

 

Don't we all...

 

I wished I established a position, any size.  :( :( :( :( :(

[LC]

I am using this as a learning opportunity. Between the comments on this thread from before the AWN deal went through and onwards, it should provide a good review of where some errors made in my investing judgement are!

[ok22]

I understand and am happy for those that made money on the stock going up.  Nice letter, presentation etc. I did not buy any and do not have any position here.  Feel like I am missing something amongst the excitement.  Perhaps someone can poke holes in my math and help me become a buyer:

 

When I look at ALSK today and going forward based on their 2013 and 2014 numbers and the $190m coming in over 4 years I see the following numbers:

 

Year End 2013:  Net Debt $420M

 

Cash coming in from AWN over next 4 years = $190m

 

Free Cash Flow for 2014 = $15m

You can double check this number by looking at their $90m EBITDA less their $45m capex less their $31m interest expense and assume $0 net effect of taxes and working capital impact

 

So in the at the end of the fixed AWN payments we have Net Debt=$220m

Assume they use $60m (15 per year *4) of free cash flow to also reduce debt over the next 4 years

So:  Net Debt in 4 years = $160m

Interest Expense Reduction/Savings = $260*8% (estimated) = $21m approximately

So in 4 years Free Cash flow would be $36m if there was no increase in cash flow from operations and no reduction in capex and no change to the net $0 assumption on taxes and working capital.

Depending on your discount rate for the $36m (lets use 10% to keep the math simple and account for a messy industry) in 4 years; I get an equity value of $360-160= $200m.  Stock is now at equity value of $147m so upside is 33% in 4 years?

 

So in order to get excited today and buy the stock or hold the stock (if you have been smart like Packer etc. and bought before and not thumb sucking like me) then you need to believe the following:

 

1.  Free Cash flow will grow which means either cashflow from operations will grow or capex will decline or both

2.  And/or their is value for someone to acquire ALSK.

3.  The 1/3 share of AWN yields tons of free cash flow to the parent (ALSK)

 

Given the competitive nature of the industry and historically low ROIC in this industry why is the consensus under this topic so positive on the future of ALSK?  All I see is a company that will not go bankrupt and has bought time to delever etc. but is it a free cash growth story and is all the large capex really going to turn into strong cash generation?

 

To be clear:  I am looking it as someone that might buy the stock at the $147m market cap so my question or confusion is does one not need to believe that this is a free cash flow growth story going forward to buy here and how does one get comfortable with that when management themselves is telling you that free cash flow will decline from TTM to 2013 to 2014.  After that one has to believe huge reductions in capex or big operating cash flow jumps from revenue/profit growth.  Makes me nervous to believe that for a telecom in a small and about to be more competitive market.

 

Would appreciate board members' thoughts.

And feel free to dissect/correct my analysis above.

[Packer16]

I think you are missing normalized cap ex which is probably closer to $35 million on $200 million of post AWN revenues.  So if add $10 million to FCF to equity of $46 million.  So if you use your discount rate you are closer to $460 million in year 4 or $315 million today.  In addition you are calculating FCF to the equity so you don't subtract the debt.  If you want to calc at EV level you need to add back interest expense ($10 million) then you can subtract the debt.  So you are closer to $56 million @ at 10x multiple gives you $560 million less $160 million get you $400 million for the equity in year 4 or $273 million today.  This assumes no growth a very conservative assumption. 

 

As another data point, the ALSK sub bonds now trade at 85.

 

Packer

[hyten1]

i see it very simply

 

160 mk cap, 600 EV

 

as they pay down debt, if EV stay the same mk cap will need to go up :)

 

160k pay down in debt (assuming everything else is the same) will mean a double of the stock :)

 

i need to study this in more detail as not to sell too early

[blainehodder]

I had a 20% position!  Thanks Packer one more time.

 

Go back to the first page and you will see that Packer's math does include the stated cost synergies from the old investors presentation. Does anyone need me to dig this up?  It is still on the ALSK site somewhere. 

 

AWN projects 120M EBITDA plus the $30M synergies = 150M EBITDA .  subtract out the 40M capex for AWN and you hit Packer's 110M.  ALSK gets 30%. or the 37M.  It might not work out that well, but that seems like a good base case scenario.  If you need to, start lopping away at the AWN numbers as you see fit from the VZ entrance.  If this was the only cash flow it looks to be a decent price... but wait!

 

You are halfway there...

 

OK22, I think you might be assuming wireless is the only payout? Or perhaps you are missing the AWN piece... If you go back to the recent presentations look at the non wireless numbers.  Remember that Wired is somehow defying gravity here.... it defies my logic. so be pessimistic.  assume they do 50M EBITDA for the non wireless. Make it 40. It is still a bargain.

 

 

 

While I think the 10% discount rate or 10 times multiplier might be a little high, it really still looks like a 50 cent dollar. Management executed on the debt reduction.  That is what really does it for me.  I had a feeling they would only pay down 50M or so this year...they are basically doing what they have stated they would do.  That is all that needs to be done for Packer's napkin math from the start to be close.

 

 

The real clarity on how big of a bargain this is comes when you look at the comps.  This is a takeover target right now.  Even if you are pessimistic on the multiple and the cost synergies, unless you believe VZ is going to crush AWN on entry, how could it be worth less than 400M for the equity?

 

I'd probably buy more at this level, but am feeling a little bloated with ALSK.

 

Does anyone have a bear case on the VZ entrance?

[ok22]

First, thanks for the responses and engaging on my post.

 

Couple of follow up questions:

 

1.  The 1/3 share of AWN's FCF:  thought the deal was structured so that they get 1/3 of the FCF above the minimum guaranteed payments for each of the next 4 years.  And from Year 5 they get their 1/3 share of whatever FCF is.  You all seem to think it is in addition to the minimum annual guaranteed payments for the next 4 years.  Have I misread or misunderstood the deal or your comments?

 

2.  And on the takeover target theory - who would buy it?  Logically should VZ not have bought it before entering as a stand alone?  And would GCI not have bought it before setting up the AWN joint venture?  Obviously we are speculating here but usually one can think of a list of logical buyers for a takeover candidate; here I am struggling to think of who would buy it?  Who are the list of buyers and why in your opinion?

 

3.  Why is ALSK needing to spend these large amounts on capex for 2013 and 2014?  What is going to and how does it help their future growth potential?  Is it defensive against new competition or is there some large growth potential that is to be tapped by their big capex plans?

 

 

[blainehodder]

1.) You are misunderstanding our comments. The first four years alsk gets only the prefs from AWN...after that they get 30% after the pref period.  but I think you are missing that alsk isn't just the 30% AWN ownership. That is just the wireless piece.  add the legacy wired etc ebitda.

 

2.) At this price, why couldn't anyone buy them? It would be a massive arb if you could take this private anywhere near the current price.

 

[Packer16]

You are correct on how it structured so the equity numbers are in 4 years so the PV using 10% DR is $460/1.46 or $315 million today.  As for takeover prospects, the most likely would be cell phone cos (so you are talking Sprint or T-Mobile) or maybe Liberty Global.  I think VZ or GNCMA would have anti-trust issues.  If they purchase they get both wireless synergies plus a network that has great returns due to lack of competition (only GCI who is a rationale competitor).  In both Alaska and Hawaii, I think the pipes are quite valuable due to lack of competition in contrast to the lower 48 where competition is fierce.  All of the new cap-ex is to provide broadband services (the most valuable portion of telcom and cable bundles) and backhaul for all of those new VZ subscribers.

 

Packer

[gary17]

are dumb questions allowed here.

 

looking at Morning Star research report  ALSK has traditionally traded around 5 or 6 times cash flow during good times... 

 

Are we saying cash flow = $37M?    So  5 or 6 x $37 = 185 to 222 million  MC.     

 

 

[Packer16]

No problem and welcome.  I am not sure what cash flow means to Morningstar but I like to use free cash flow and EBITDA when valuing telecos.  Free cash flow for more mature names and EBITDA for names that are investing heavily in networks.

 

Packer

[gary17]

Hi Packer , thanks... I think 'cash flow' is probably defined differently. 

 

So I just spent the last 8 hours reading through this thread and looking at the release today...  so if I understand correctly the investment thesis is that this company with AWN will have a EBITDA of about $100M to $110M  -  with Verizon coming in this may go down  - so let's say $90 - $110M EBITDA 

 

The company has a lot of debt, but with the approval of AWN - we are saying the initial payments plus FCF  will be able to pay down the debt

So the company using EBITDA of its peers should trade at around 5 to 6 times EBITDA or $450M to $650M range if the market were efficient....?  ???

 

How would you value the company based on FCF? 

 

--

Packer, in your first post - you noted the following....  I am not following how we are using AWN's EBITDA for covering ALSK's debt.........  isn't ALSK only going to own 1/3 of AWN?   

 

Based upon the current level of EBITDA, AWN is projected to generate $120 m in EBITDA plus and additional $30 m of synergies.  AWN is forecast to have $40 m in cap-ex and thus a FCF of $110 m.  ALSK's preferred return is $48 m per year (so there is over 2x coverage for this payment).  In stressed scenario where Verizon takes 33% of AWN's business, AWN will still generate $70 m ($120m * 2/3 + $30m - $40m) with a 1.5x coverage ratio.

 

--

 

I am not an accountant by training; but just from reading the materials from ALSK's web site  I see positives in a CEO who has laid out a plan and communicates well with his shareholders; and the company decided to increase liquidity.

[tombgrt]

That last quote from Packer is just to show that it is very very unlikely that ALSK will not get it's $190m in preferred payments over the next 4 years. After those 4 years they get 1/3th of whatever AWN is generating but in those first 4 years it's capped at the $190m in total. Anything above their annual share of +-50m goes to GCI.

This deal is really a winner for both ALSK and GCI. ALSK is giving up some of its piece of the pie to deleverage itself while also working on growing their most promising segments.

 

I think the Verizon threat isn't that severe as some are fearing. They have some great assets in place and one should not underestimate the great business that broadband is for example, growing at 20% YoY and a very profitable business. Look at the numbers, management is doing a great job. While they deleverage, equity will shoot up.

[Packer16]

On ALSKs EBITDA - it should be around $90m (including dividend from AWN) - assuming no growth (which is conservative given ALSKs largest remaining service is broadband connectivity in the richest state in the nation in duopoly market with a rationale competitor).  If we subtract $35 million (steady state cap ex @ about 16% of revenues) from EBITDA we get FCF of $55 million (before interest expense) and $30 after interest expense.  ALSK has tons of NOLs so it will not be paying taxes for a long time.  So if we apply a 10x multiple to equity FCF we get $300 million vs. a mkt cap of $147 million.

 

In previous response to ok22 I was off so I changed response below.

 

Packer 

[giofranchi]

I don’t follow ALSK, so forgive me if my questions have already been answered!

 

Reading some of these posts I have understood that ALSK is in a turnaround and that management is doing an excellent job.

 

As always, I am intrigued by a great management with a sound strategic view! So, I would like to know:

 

1) What’s their track-record? I know they have started just a little more than 2 years ago at ALSK, but what had they accomplished before? (Mr. Brindle, for instance, before founding Lancashire, had sustained a track record of 19% ROE for more than 15 years at the helm of Syndicate 488, which grew to be among the largest syndicates at Lloyd’s. Can something similar be said about Mr. Vadapalli or Mr. Graham?)

 

2) How much of the company is owned by the management who has engineered the turnaround?

 

Thank you, :)

 

giofranchi

 

[alertmeipp]

On ALSKs EBITDA - it should be around $90m (including dividend from AWN) - assuming no growth (which is conservative given ALSKs largest remaining service is broadband connectivity in the richest state in the nation in duopoly market with a rationale competitor).  If we subtract $35 million (steady state cap ex @ about 16% of revenues) from EBITDA we get FCF of $55 million (before interest expense) and $30 after interest expense.  ALSK has tons of NOLs so it will not be paying taxes for a long time.  So if we apply a 10x multiple to equity FCF we get $300 million vs. a mkt cap of $147 million.

 

In previous response to ok22 I was off so I changed response below.

 

Packer

 

May I know why  you think 10x is a fair number?

[Packer16]

10x FCF implies a less than 1% growth using the Graham approx for multiples of 8.5 + 2G.  I think given the Alaskan market that growth could be higher with only 2 plays in the wireline broadband business (ALSK and GNCMA).

 

Packer

[gary17]

Thanks Packer and tombgrt for your help; what you said make sense.

 

Packer, if you had to put a percentage down for chance of success / failure... what would your numbers be given the information known today:

 

__%  ALSK fails  in 5 years - stock worthless

 

__%  ALSK is less profitable than today due to intense competition - stock worth $1.5 - $2/sh

 

__%  ALSK is more or less as today - stock worth $ 3 - $3.5/sh

 

__%  ALSK get bought out by another telecom - stock worth ___? / sh

 

__%  ALSK fully valued based on success of its turn around plan - stock worth $6 - $8 / sh

 

Thanks!    Gary