ALSK - Alaska Communications

[zippy1]

zippy

have you bot value stocks in taiwan?  i'm from taiwan originally too, but can't find a good system that allows me to screen stocks in taiwan....  i've only bot 6206 from about 2 years ago - pays about 13% dividend i believe.

Gary,

 

      This one is a site that some friends set up. Membership is free for basic level.

 

http://statementdog.com/

[plato1976]

Thanks , Packer !

I have another question on debt.

So for these highly leveraged companies like ALSK or even GNCMA, how will the interest rise of long term debt (10year treasury, for example) impact its debt cost ? I think they locked a rate for a few years, but they are pretty highly leveraged, so even after a few years their debt level will still be high, and if at that time they need to refinance and interest is high that will be pretty bad

 

I don't believe short term interest (1year etc.) will move any time soon. But long term interest rate can fluctuate very dramatically

 

It has gotten cheaper but I still like GNCMA better because it is cheaper and has less debt on a EBITDA basis and safer from a coverage perspective and organic CF growth of about 7% per year.  It also qualitatively has an effective capital allocater.  ALSK also appears to have one also but his track record is shorter than the CEO of GNCMA.  I still hold ALSK but I have a much larger position and have been adding to GNCMA.  GNCMA has a nice presentation on their web site. 

 

Packer

[Packer16]

The current pricing is about 85 cents or a yield about 10.5%.  As to rising interest rates, these high yield names are not effected to the same extent as treasuries or investment grade bonds.  These bond yields may actually go down if debt is paid down.

 

Packer

[gary17]

It has if other factors are present for a turnaround.  The price of ALSK bonds have rallied to the 83/84 level so we will see.

 

Packer

 

 

Thanks Packer - just noticing the bond pricing hasn't changed much yet the commons are down about 40% from the peak...  interesting...

[plato1976]

I see . I was under the impression that these debt interests just came down in recent years when FED began to pump in huge amount of money. It's not that low in the past. But seems in this case my guess is wrong according to your comments.

 

The current pricing is about 85 cents or a yield about 10.5%.  As to rising interest rates, these high yield names are not effected to the same extent as treasuries or investment grade bonds.  These bond yields may actually go down if debt is paid down.

 

Packer

[krazeenyc]

It has if other factors are present for a turnaround.  The price of ALSK bonds have rallied to the 83/84 level so we will see.

 

Packer

 

 

Thanks Packer - just noticing the bond pricing hasn't changed much yet the commons are down about 40% from the peak...  interesting...

 

To be fair,

 

Since Packer's first post in May when the bonds were trading in the high 70s ALSK has paid down appx $115 million of debt. Shouldn't be a surprise that the debt has rallied.

[gary17]

So just looking at ALSK / GNCMA a bit more; some observations:

 

- Interesting that ALSK's AWN distribution represented 47.6% of AWN's FCF - seems lower which suggests AWN is doing better than expected?

 

I believe they were projecting FCF of 80M  for AWN; less 4% for management fee is about 76.8M.    For July 23 - Sep 30 or for 70 days the FCF net of GCI fees for AWN was about $20M, seems to imply on an annualized basis FCF will be 104M net of GCI fees.....  that's significantly more than 76.8M.  Perhaps there's seasonality and spending I'm missing here as Q1 is generally slowest and there's likely more spending to come, but still seems like AWN is doing well at this point even if I look at the ebidta figure... and GCI is going to benefit.

 

- On guidance & Q4 when there's 100% of AWN in operation:

 

ALSK guided 105M ebidta for F2013 ; its first 9 month ebidta was 90M , implying Q4 will only be 15M or 60M annualized (post AWN)  - seems quite weak.  I believe the Q2 presentation just when AWN closed they were projecting 90M for the first full year post AWN.

 

GCI guided 265M ebidta for F2013; its first 9 month ebitda was 200M , implying Q4 will be 65M or 260M annualized (post AWN).

 

this seems to suggest GCI has the upper hand in this game  ??? 

[tombgrt]

GCI is partly much more attractive because you are barely paying extra for more guaranteed future growth. 2014 ebitda for GCI should be around $300M. If they get 5% annual ebitda growth going forward, under the 7%+ they got in the past, you get 25% additional upside / year at current prices ($15M x 7 (conservative) = $105M to EV which is +- 1/4th of current equity). ALSK's situation is much more uncertain.

[krazeenyc]

So I ended up selling this around $2.78 -- after realizing that ALSK can't really easily sell their AWN stake until 4 years past the anniversary date (according to their deal with GCI). (And of course I was a luckbox in this instance to be able to sell at the price I did). 

 

But I wanted to take another look now that the price dropped almost 30%. 

 

A few possible negatives:

 

Right now, Ebitda is artificially high b/c they are getting $50 million from the AWN preferred distribution.

And this will possibly drop to $35-$40 million after the preferred distribution period is over after 4 years. 

They will only be cashflowing appx $15 million per year to pay down debt over the next 4 years.

 

But wait... (Please correct me if I'm wrong)

According to ALSK management they are:

1) Spending $15 million per year in SG&A for growth.

2) Spending $10 million + per year on Growth Capex.

So this means even if they don't end up growing, they can pull on these levers to increase Cash flow by $25 million annually? Do I have this right? Remember baseline wireline ebitda was $58 million -- $3 million is going to AWN via backhaul but $15 is being decreased through additional SG&A (marketing spend)

 

If you value AWN at $300 - $350 million and believe that management can increase cashflow by $25 million annually simply by taking away spending for growth ALSK is dirt cheap. 

Srry for the poor format.

                Bear         Base         Bull

 

EBITDA 90,000 90,000 100,000 110,000

AWN         50,000 35,000 40,000 45,000

WIRELINE 40,000 55,000 60,000 65,000

 

EBITDA 90,000 90,000 100,000 110,000

G CAPEX 45,000 35,000 35,000 35,000

DEBT PAY 30,000 25,500 25,500 25,500

FCF         15,000 29,500 39,500 49,500

 

I expect that ALSK will end up selling their Stake in AWN making it an even more compelling investment (just assume they'll use the cash to pay down debt to 3.5x ebitda or lower and buyback shares as well). What worries me is that ALSK insiders are not buying.... hmmmm. I bought a nice stake at $2.06 today and am mulling larger buys. But I want to see if there are things i'm missing.

 

 

[Guest wellmont]

 

But wait... (Please correct me if I'm wrong)

According to ALSK management they are:

1) Spending $15 million per year in SG&A for growth.

2) Spending $10 million + per year on Growth Capex.

So this means even if they don't end up growing, they can pull on these levers to increase Cash flow by $25 million annually? Do I have this right? Remember baseline wireline ebitda was $58 million -- $3 million is going to AWN via backhaul but $15 is being decreased through additionally SG&A (marketing spending)

 

 

I would think that if they don't make those growth investments revenue and ebitda will decline. I think your assumption is they would stay stable. wireline is a declining business.

[krazeenyc]

 

But wait... (Please correct me if I'm wrong)

According to ALSK management they are:

1) Spending $15 million per year in SG&A for growth.

2) Spending $10 million + per year on Growth Capex.

So this means even if they don't end up growing, they can pull on these levers to increase Cash flow by $25 million annually? Do I have this right? Remember baseline wireline ebitda was $58 million -- $3 million is going to AWN via backhaul but $15 is being decreased through additionally SG&A (marketing spending)

 

 

I would think that if they don't make those growth investments revenue and ebitda will decline. I think your assumption is they would stay stable. wireline is a declining business.

 

Right but my assumptions also accounts for 4 years of this increased growth CAPEX  and SG&A i spending .  So it would be really bearish if after 4 years of this spend that their wireline ebitda would remain the same.

 

They operate in a duopoly and in many cases their customers actually don't have any choice to go to a competitor.  Do they have any competitors for voice via copper (non-voip?) which is likely going to decline the fastest.

 

But yes I agree, if in fact, the "growth" spending is in fact not growth spending, but maintenance spending that's a problem.

[Guest wellmont]

their competition is wireless.

 

this is the vulnerable revenue. the growth cap ex and marketing is to bring on revenue streams to replace this revenue.

 

Consumer access lines declined by 1,716, or 3.3%, to 50,722 and business access lines decreased by 446, or 0.6%, to 80,071.

[gary17]

 

 

If you value AWN at $300 - $350 million ....

 

 

Krazeenyc - how did you get such a valuation? seems low.....  i thought AWN's ebitda will be about $120M first year and at 6x that's closer to 720M.  AWN will have no debt. 

 

   

EBITDA 90,000

AWN         50,000

WIRELINE 40,000

 

 

so the wireline at 40M x 5 = $200M 

 

if 1/3 of AWN is about 240M then  ALSK is worth about 200M (wireline) + 240M (33%AWN) = 440M less debt.....

 

So by the end of 4th year how much debt will they have still?

 

[krazeenyc]

 

 

If you value AWN at $300 - $350 million ....

 

 

Krazeenyc - how did you get such a valuation? seems low.....  i thought AWN's ebitda will be about $120M first year and at 6x that's closer to 720M.  AWN will have no debt. 

 

   

EBITDA 90,000

AWN         50,000

WIRELINE 40,000

 

 

so the wireline at 40M x 5 = $200M 

 

if 1/3 of AWN is about 240M then  ALSK is worth about 200M (wireline) + 240M (33%AWN) = 440M less debt.....

 

So by the end of 4th year how much debt will they have still?

 

On the AWN -- I was saying if ALSK sells their AWN stake in 4 years -- they can get between $300-$350 million.  Otherwise I just ignore it and just include the ebitda it generates.

 

I assume ALSK will have $350 million in net debt - $55 - $60 million less than today. I'm not assuming a better interest rate even though they'll have better ebitda coverage. But I am assuming in the various scenarios that management is being truthful in that $25 million + of their current spending is on growth initiatives/investments.

 

They're trying to grow wireline revenue (as management gets bonuses based on achieving $207.5 + of wireline revenue and $95 million + of ebitda in 2013).  Over the longer term, they get bonuses for achieving certain Debt/Ebitda ratios (maybe helps us to understand why they bought out some of the convertibles). 

 

[gary17]

I wonder how much they can grow the wireline business in a state with low population and it's a declining tech....

 

If we assume sale of AWN will basically get ALSK completely debt free  then what's left is a wireline business generating about $40M ebitda and probably spending $25M a year on growth.... is this a business that's attractive at today's price tag of $100M? 

 

 

 

 

[Guest wellmont]

wireline business grow? no wonder the stock is going down.

[krazeenyc]

I wonder how much they can grow the wireline business in a state with low population and it's a declining tech....

 

If we assume sale of AWN will basically get ALSK completely debt free  then what's left is a wireline business generating about $40M ebitda and probably spending $25M a year on growth.... this this a business that's attractive at today's price tag of $100M?

 

I'm not a telecom expert -- that's why I'm hoping on Packer to chime in. HINT.

I wouldn't expect ALSK to be debt free or try to be, but I expect they would attempt to be at 3.5x debt/ebitda.

 

But for a second pretend that they took the full $300 million to pay down the $350 million dollars of debt they had remaining leaving them with $50 million in debt. Let's also assume conservatively that wireline ebitda did not grow (which it should if they're spending $25 million a year for it).

 

At that point if they stopped spending the growth capex and increased marketing dollars.

They'd be at

 

Wireline $65 Million - $5 million interest = $60 million FCF. Obviously this assumes they sell AWN. But you'd be paying 1.5 FCF at $100 million.  FCF would likely decline at these barebone levels, but if you could find a lesser amt that could keep ebitda steady or declining slowly enough it would work out very nicely.

 

So far this year -- wireline revenues are up slightly.  EX the backhaul revenues that are moving to AWN anyways wireline revenues are up about 4% from $103 million to $107+ million.

[gary17]

Kraze

I believe Packer's earlier post below answers your question.

 

I think this has definitely got me interested. I think wireline probably has a bit more need in Alaska than the rest of the country... Perhaps due to the fact that not everything can be reached by wireless signal in an economically viable manner... will do more research on this.

 

You also have to remember the wireless business that ALSK owns 1/3rd of has little or no debt.  There is a $50 million credit line with GNCMA and that is it.  The JV will generate on the order of $150 m in EBITDA post synergy so in theory money could be borrowed at the JV level and sent to each partner.  Typically wireless firms have at least 2 to 3x EBITDA of debt so that equates to $250 to $400 m if you assume $50 m debt today or $83 to $133 m of value to ALSK that can borrowed via AWN.  You also have to remember that both GNCMA and ALSK's EBITDA should be increasing a rarity in the telecom world.

 

BTW the takeout multiples have been 6.5 to 7.5x for wireless business (in the lower 48) which implies a total value of AWN of $975 to $1125 m.  Less debt gives you a value of $308 m to $375 m for ALSK's stake in AWN.  The current EV is $535 so the remaining high speed wireline business is worth $160 to $227m with a growing base EBITDA of $40 million.  So getting a high speed internet business for 4 to 5x EBITDA is not too bad.  This assumes no future growth in one of the richest states in the US.

 

They did have an additional $15 million in S,G& A forecast for Year 1.  If they cannot at least generate an equal amount of revenue growth then this should be able to be reduced.

 

Packer

[Packer16]

They have been able to grow the telecom business revenue by about 1% per year (which is great) primarily by broadband expansion.  They were able to overcome the declining wireline drag by broadband.  AWN has had great results so far $196 million annualized w no synergies and $120 annualized million FCF.  So the $150m with synergies may be low.  If you have a slow growth lets 3% EBITDA growth business with $40 million of EBITDA and 1/3 of AWN for $500 million.  If 1/3 of AWN is worth lets say 7x $175 million is $408 million so you are getting $40 million of EBITDA for $90 million.  It is probably worth at least 5x EBITDA or $200 million.  So you have a double if AWN can generate $175 m of EBITDA. 

 

Packer

[krazeenyc]

They have been able to grow the telecom business revenue by about 1% per year (which is great) primarily by broadband expansion.  They were able to overcome the declining wireline drag by broadband.  AWN has had great results so far $196 million annualized w no synergies and $120 annualized million FCF.  So the $150m with synergies may be low.  If you have a slow growth lets 3% EBITDA growth business with $40 million of EBITDA and 1/3 of AWN for $500 million.  If 1/3 of AWN is worth lets say 7x $175 million is $408 million so you are getting $40 million of EBITDA for $90 million.  It is probably worth at least 5x EBITDA or $200 million.  So you have a double if AWN can generate $175 m of EBITDA. 

 

Packer

 

By the way -- when I say wireline I mean wireline voice + broadband. FROM the ALSK presentation, they seem to be saying that 2011 Wireline Ebitda was $58 million (-$3 going to AWN for backhaul) and (-$15 going to increased marketing and sales for their broadband business) -- so post AWN $40 million EBITDA from wireline. They also said, they're now spending $45 million a year on "growth capex" compared with $35 or so as a "maintenance cap ex". After building up their broadband revenues, can't they drawn down the marketing spend and "growth" portion of the capex to boost cashflows?

 

[gary17]

But wait... (Please correct me if I'm wrong)

According to ALSK management they are:

1) Spending $15 million per year in SG&A for growth.

2) Spending $10 million + per year on Growth Capex.

So this means even if they don't end up growing, they can pull on these levers to increase Cash flow by $25 million annually? Do I have this right? Remember baseline wireline ebitda was $58 million -- $3 million is going to AWN via backhaul but $15 is being decreased through additional SG&A (marketing spend)

 

Krazeenyc - so here's the slide from ALSK -

just trying to check my math here...

so let's take AWN out of the picture and let's just assume that cancels out all of ALSK's debt to zero... so like Packer said, we are left with a company that's got about 40M ebitda priced at about 90M. 

 

what would the free cash flow be?  this 40M includes the increased 15M SG&A spending per the slide attached is the way I understood it.  i'm just approximating it as ebitda less capital spending less interest expense which is zero - so if they spend just enough for maintenance, this suggests a very high FCF that can be used to pay out dividends or buy back shares....  like a 30 - 40% implied yield.....  ???

[gary17]

They have been able to grow the telecom business revenue by about 1% per year (which is great) primarily by broadband expansion.  They were able to overcome the declining wireline drag by broadband.  AWN has had great results so far $196 million annualized w no synergies and $120 annualized million FCF.  So the $150m with synergies may be low.  If you have a slow growth lets 3% EBITDA growth business with $40 million of EBITDA and 1/3 of AWN for $500 million.  If 1/3 of AWN is worth lets say 7x $175 million is $408 million so you are getting $40 million of EBITDA for $90 million.  It is probably worth at least 5x EBITDA or $200 million.  So you have a double if AWN can generate $175 m of EBITDA. 

 

Packer

 

By the way -- when I say wireline I mean wireline voice + broadband. FROM the ALSK presentation, they seem to be saying that 2011 Wireline Ebitda was $58 million (-$3 going to AWN for backhaul) and (-$15 going to increased marketing and sales for their broadband business) -- so post AWN $40 million EBITDA from wireline. They also said, they're now spending $45 million a year on "growth capex" compared with $35 or so as a "maintenance cap ex". After building up their broadband revenues, can't they drawn down the marketing spend and "growth" portion of the capex to boost cashflows?

 

I am wondering if the $45M is just on the wireline or both wireline and wireless (AWN).  It's not clear from the slide and I didn't hear the conference call.

 

[Cunninghamew]

Is it just me or do the ALSK April $2.5 calls seem silly expensive at $0.30 per contract.

 

I have been buying the stock and writing covered calls to help build my holding

[gary17]

I did look when it was 0.50  but didn't do anything....  it's still good - implied upside of $2.4 from today's 2.1 while protects you from going down....  but the volume seems low. 

 

 

[Cunninghamew]

volume doesnt matter for my small PA :)...  I also was buying common and writing them at 0.45 and 0.5

 

also implied upside is higher than $2.4...  implied upside is call price + strike so more like $2.8  :)

 

My goal is to not have it be a ceiling. I am hoping, but cant count on it that I will be able to offload the options before it matters at a cheaper price, but I would take either scenario

 

also gives you 30 cents of downside protection at todays price