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AXX.to - Axia NetMedia


Cunninghamew
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This looks like a pretty compelling opportunity. I scalped the idea from a VIC post written in Jan of 2012. I will keep the write-up short and sweet.

 

Teaser

1. Trades at very low EV/EBITDA multiple

2. Past build out of fiber networks was very capital intensive and that is mostly behind them

3. Additional customers/connections revenue falls more or less to the bottom line

4. I think it is cheap, bc people just got tired of waiting on the earnings power to emerge. The stock has traded like a dead heartbeat for the past 4 years and is finally starting to pick up some interest.

5. The old VIC write-up highlighted a late 2011 transaction where they sold 50% of their French assets (Covage) for $92 million.  Today's EV is approx $83mm.

 

Overview

Axia is a non-traditional telco. The own/operate fiber lines throughout Canada and France. Traditional telco's own fiber and sell their services over that fiber. For example, when I moved into my home Time Warner owned the fiber running there. My only other options were DSL or satelite, but I didn't want either so I went with Time Warner (the monopoly in my neighborhood). Axia approached local governments about building out fiber with the understanding that they would not sell services over that fiber. Instead, they sell the use of their fiber to retail service providers like Verizon and AT&T. The benefit of this model in the government's eyes is that the end-user has more choice and it fosters competition between the service providers.

 

Long-story short. This model seems to have gained a lot of traction with local governments. Axia has successfully implemented it in Alberta, France, Spain, and Singapore. Recently, the company sold its assets in Singapore and Spain (for approx $38mm) and what remains is North America (mostly Alberta) and France.

 

Valuation

 

Price $1.93 / Market Cap $120mm / Pro-forma EV $83mm  (this EV is understated slighly, because I used the full proceeds from the asset sales. However, it works for back of the napkin purposes).

 

TTM EBITDA from remaining business units: $26.5mm

 

Multiple is approx 3.11x EV/EBITDA

 

Other Info

 

* Read http://ir.axia.com/files/doc_financials/2013/AXX%20Q2%202013%20MDA%20FINANCIALS_v001_f54j1m.pdf

 

Total EBITDA (from North America & Covage)

Q2-13: 7,530,000

Q1-13: 6,882,000

Q4-12: 5,875,000

Q3-12: 6,166,000

Q2-12: 5,179,000

Q1-12: 4,881,000

 

 

 

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Good summary of the situation.  I've owned this for a year and like it just as much today than I did when it was trading at roughly half the current price. 

 

Hard to argue that the stock isn't significantly undervalued at just over 3x EBITDA and so downside is very limited, especially given the growth profile of the assets. The company is flush with cash and so there could be a shareholder friendly event (dividend, buyback, etc) in the near future which could be a catalyst to move the stock higher.  The risk here is that they make a bad acquisition but given this management's history, I don't think that is a high probability event.

 

Doubt this stock trades at this level 12-24 months out.

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I am starting to question the EBITDA numbers.  I haven't figured it all out, but I think you are including 100% of Covage whereas they only own 50%.  I could very well be missing something as I am so new to the idea.

 

From their 10-Q.

 

EBITDA

EBITDA totaled $2.4 million for the quarter compared to $0.4 million for the same quarter last year. The increase is reflective of positive operating leverage arising as a consequence of increases in revenue not resulting in commensurate increases in operating expense. For the six month period, EBITDA shrank $0.7 million or 11 % to 5.4 million.

 

 

Also, look at page 29 of the financial link that was posted.  The page has a breakdown of the EBITDA for the quarter.  At first they build it up to $7.5M but then there is something called IFRS elimination, which drops it down to $2.4M.  I am just speculating that that is the result of adjusting for their actual ownership percentages.  Happy to be corrected on this one.

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My calculation of EBITDA is closer to $21 million(annualizing the last Qs adjusted of EBITDA of $5.2 million - $7.5 m consolidated EBITDA less $2.3 million (50% of Covage EBITDA)).  I like the company as it has a unique model however at today's prices, it does not appear as cheap other merchandise in the telco store.

 

Given the lack of owning most of the pipes, I think this type of firm deserves a lower multiple than lets say a cable co or even a growing telco (where they do own the pipes).  As a result, they are always at risk of the contract being cancelled when the current contract expires.  The renewal of the Canadian contract is in part what has led to the rally this year.  So a multiple of 6 may be appropriate, so based upon the current capital structure the upside is about 33% or a 75 cent dollar.  If they can put some of the cash they received from the recent sales to work then the value will be more.

 

Packer

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OK, I understand it now.

 

The IFRS adjustments back out Covage which is the same as just combining corporate expenses with north american revenue / expenses.  In other words, if Covage didn't exist what would things look like.  This gives about 2.85M EBITDA.  They then take into account the 50% of net income from Covage which is -.46M (but this is net income not EBITDA from Covage), so that gets you to the 2.4M.  It is just an accounting thing.  I think it has to do with equity investments but I honestly don't understand it.

 

I am going with packer's numbers.

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Good summary of the situation.  I've owned this for a year and like it just as much today than I did when it was trading at roughly half the current price. 

 

Hard to argue that the stock isn't significantly undervalued at just over 3x EBITDA and so downside is very limited, especially given the growth profile of the assets. The company is flush with cash and so there could be a shareholder friendly event (dividend, buyback, etc) in the near future which could be a catalyst to move the stock higher.  The risk here is that they make a bad acquisition but given this management's history, I don't think that is a high probability event.

 

Doubt this stock trades at this level 12-24 months out.

 

I took a big position in this thing about 2 years ago (avg. cost $1.50 per share). Meanwhile, I watched it drop 20-30%, and now its up 20-30% (from my purchase price). Anyway, I like it. My only concern is that others on this board like it. It makes me think that I'm in a trap.

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No_Free_Lunch  you are indeed correct about the EBITDA numbers I used. After rereading the MD&A it is clear from the footnotes that the EBITDA figures quoted represent 100% of Covage and not 50%. Sorry for the error. Below is a new table where I have simply cut the past Covage numbers in half.

 

    Qtr        North Amer      Covage        Corporate        Total
  Q213      4,443                2,334          -1,581              5,196
  Q113      5,100                1,678          -1,573              5,205

  Q412        4,351                1,304          -1,779            3,876

  Q312        5,275                770              -1,934              4,111 

 

 

Regarding ownership and contracts.

 

Alberta Supernet - they own some fiber, but the vast majority is under contract. That contract was just renewed and is good till June of 2018.

 

France "Covage" - they do not own the fiber here. In France a community awards Covage long-term concessions (between 15-25 years) to deploy fiber with their subsidies and then to sell their services over that fiber. It is possible that after such a period the contract is not renewed. So far two contracts from local communities have been renewed. I don't know what the mix looks like right now, but my inclination is that most of these contracts have significant life left on them.

 

Massachusetts - here the government owns the fiber. Axia operates the fiber and sells service to government's customers. The initial term is 10 years and is renewable. Axia also has the right to sell services to non-government customers, and is guaranteed backhaul on the gov asset.

 

Long-story short:  The company is still cheap at 3.8x EV/EBITDA, but it is not as cheap as I thought it was on my first pass. I own a small position and don't plan on selling it here. They have built a sizeable cash hoard from the recent divestures. As 17thstreet pointed out there are a few shareholder friendly actions they could take at this juncture that might serve as some catalyst. The upside case is dependent upon what happens with Covage. If this asset continues to grow and mgmt hits its penetration target of 15% than the EBITDA it puts off will be much greater than its current contribution of approx. $6mm.

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