Atlantic Tele-Network Looks Undervalued At The Current Price

Jul.25.13 | About: ATN International, (ATNI)

Atlantic Tele-Network, Inc. (NASDAQ:ATNI) is a telecommunications service provider in underserved markets of North America and the Caribbean. The company generally caters to the needs of underserved regions. In the quarter ending March 2013, the company's Alltel unit posted disappointing results due to weak postpaid ads and roaming. But the company is in the process of selling Alltel to AT&T (NYSE:T) for $780 million. The company's other business unit showed impressive growth in the quarter.

After the sale of Alltel, the company's presence will be limited, with CommNet being the only business left in the U.S. The company has CommNet, Island, GT&T, and SoverNet. We expect that ANTI will utilize the money from this sale to invest in new businesses, pay off its debt, and return excess cash to its shareholders. We expect the EBITDA margin to improve after the Alltel sale.

ATNI management has been very efficient and delivered value to shareholders in terms of picking good assets and getting a good return on those assets. A prime example is the Alltel business, which the company bought in 2010 for $223 million and made a further capital expenditure on of $80 million. In three years time, the company has sold the business at $780 million, which gives three times the return on the capital invested. We believe the company will again prudently utilize the capital it has generated out of the sale of Alltel and make a strategic investment that will give good returns to shareholders.

Reasons for Investment in ATNI

The sale of Alltel will help the company concentrate on its high-margin business and expand its services in the international market.

CommNet: After the sale of a few CommNet assets during Q4 FY 2012, which contributed about $16 million to revenue, and $10 million in EBITDA there will be pressure on both revenue and EBITDA in FY 2013. The capex for FY 2013 is expected to be 95 million to 105 million, with a main focus on CommNet. The company has plans to expand in the West and upgrade certain areas from 2G to 3G. With this expansion, and the upgrading of technology, I believe the company will make up for the loss of revenue due to the sale of CommNet assets.

GT&T: GT&T wireline services has been more or less flat in the recent years. We don't expect much improvement in the coming years either. As the penetration of wireless service increases, the demand for wireline will remain constant. So we expect that, at the most, it will retain its current subscription levels.

Island: Island has shown strong growth in the recent quarter. The Island business has grown at an average of 18% and the EBITDA margin is around 27%. We expect the growth to be stable in the next two years with an improvement of 1%-2% in EBITDA.

The sale of Alltel at 7x EBITDA makes the company cash-rich, which it will utilize to pay debt and have aggressive capital expenditure. ATNI entered into agreement to sell its Alltel U.S. wireless operations to AT&T for approximately $780 million in cash. The transaction is expected to be completed in the second half of FY 2013. The company bought this from Verizon in April 2010 at $223 million and made a capex of approximately $80 million. So the return on investment is quite good. Alltel constituted about 62% of the total revenue and 24% of the operating income. The after-tax cash the company will retain will be approximately $500 million. With debt of $276 million, and management's capital expenditure expectation of $85-$100 million in FY 2013, it will be interesting to see what management does with the cash in hand.

International wireless revenue has increased and is expected to grow in the high to mid-twenties. Apart from the Alltel business, which has shown a decline in the Q1 FY 2013, the company's other business segment has shown a strong growth. The other business has shown above-expected EBITDA margin.

Sum of the Parts Valuation

To decide on the intrinsic value of the stock, we did a sum of the parts valuation for the company based on expected growth and what its divisions are worth.

Island: Island has shown impressive growth in the last few years. In the last two years, the company has grown by 76% and 18%, respectively. I believe this growth will moderate and will be somewhere around 15% for FY 2013, as it has achieved in the Q1 FY 2013. For the next financial year, we expect growth to drop by 11%. In the fourth year the company will grow by the GDP growth of Guyana -- that is, 5%.

March 2013

July 2013

September 2013

December 2013

FY 2013

March 2014

June 2014

September 2014

December 2014

FY 2014

14676

17202.8

17990.6

17934.23

67803.63

16583.88

17839.99

18139.07

17057.98

69649.33

16%

16%

15%

13%

15%

13%

13%

11%

7%

11%

3522.24

4420.528

4575.62

3666.669

16185.06

4643.486

4995.197

4897.548

4093.916

18630.15

24%

28%

28%

23%

26%

28%

28%

27%

24%

27%

Click to enlarge

The EV/EBITDA multiple for the industry is around 7x, so we're assuming this for ATNI as well. The total holding of ATNI in Island is 42%:

Base Multiple 5x

7

ATNI Holding 40%

42%

EV

54772.63

Click to enlarge

GT&T: GT&T in the past has shown no growth. Currently, the business has shown negative growth. According to management, in the future the demand for wireline will be negative. Looking at the continuous declining trend, we expect 2% in the coming two years. We expect EBITDA margins to remain constant for this business.

March 2013

June 2013

September 2013

December 2013

FY 2013

March 2014

June 2014

September 2014

December 2014

FY 2014

15%

13%

14%

22692

22754.62

22,702

22,667.05

91,517

22692

22527.07

22247.84

22440.38

89907.29

4%

-2%

-3%

-3%

-1%

0%

-1%

-2%

-1%

-1%

10723

10012.03

9534.79

3666.6692

39867.95

10211.4

9686.642

9789.051

9873.766

39560.86

47%

44%

42%

41%

44%

45%

43%

44%

44%

44%

Base Multiple

6

ATNI Holding

80%

31648.69

EV

189892.1

Click to enlarge

CommNet: There is an expectation that the company will make a huge capital expenditure to upgrade its existing CommNet business in order to expand in the U.S. I believe that of the total capital expenditure of $95-%105 million the company has planned to use in FY 2013, more than half will go to the upgrading of 2G to 3G and expansion of CommNet in the western part of the U.S. We expect that the company will be able to regain the lost business due to the sale of a part of the business it completed in December FY 2012.

FY 2013

FY2014

279793.04

274197.2

2.00%

-2%

109119.28

106936.9

39%

39%

Click to enlarge

EV/EBITDA multiple

3x

EV

320810.7

Click to enlarge

Free Cash Flow to Equity and FCFE/Share

Aggregate Enterprise Value

1345475.43

Loan Outstanding

-266306

Cash and Cash Equivalent

177890

EV

1257059.43

Tax

-224000

FCFE

1033059.43

Share Outstanding

15755

FCFE/Share

65.57025897

Click to enlarge

Conclusion

Atlantic Tele-Network has been very selective and has been wisely utilizing its assets purchases and sales. The company has siphoned off the low-margin business and is concentrating on the business that has high margins. The company's future growth potential depends on its international business, which has been doing well. We believe that the company has tremendous growth from the Island and SoverNet businesses. We expect that Island will grow in the high twenties and SoverNet will grow at 100% in the coming two years.

We also expect that the company will utilize the cash from the sale of Alltel strategically, which will benefit shareholders. We have seen management's track record and believe that the company is in good hands. Atlantic Tele-Network should make certain acquisitions in the coming future. Overall, the future prospects of the company look good, so we are bullish on this stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.