Original publication date: 2006-11-01
RRsat Global Communications (RRST)
RRST - RRSat Global Communications, an Israeli company, plans on offering 4.4 million shares (assuming over-allotment is exercised) at a range of $11-$13. CIBC and Thomas Weisel are lead managing the offering. Post-offering RRST will have 17.2 million shares outstanding for a market cap of $206 million on a $12 pricing. The majority of ipo proceeds will be utilized to to acquire or establish teleports in the United States and Asia.
From the prospectus:
'We provide global, comprehensive, content management and distribution services to the rapidly expanding television and radio broadcasting industries. Our content distribution services involve the worldwide transmission of video and audio broadcasts over our RRSat Global Network infrastructure. Our comprehensive content management services include producing and playing out TV content as well as providing satellite newsgathering services [SNG].'
Our 3rd satellite ipo of the week. RRST differs from the previous two in that they are a broadcast distribution company, not a voice/data communications provider. RRST provides services to 265 television channels and 80 radio stations in over 120 countries. Continuous distribution customers include Canal Europe, Fashion TV, GOD TV, I Media, Kurdsat, Russia Today, Thai Global Network, and Turkish Radio and Television. Occasional distribution customers include CBS, Fox News, Israeli Channels (2, 5 and 10), Al Jazeera, NBC News, NTV Russia, and RAI Middle East.
Europe accounts for 40% of revenues, North America 20%. Majority of revenues are booked via five year contracts.Current contracted backlog is $101.7 million through 2016, of which $72.0 million is expected to be booked by 2008. RRST utilizes a direct sales force for the majority of business.
Teleports are the ground-based side of a satellite transmission network. RRST's principal teleport is located in southern Israel and provides direct access to satellites that can transmit directly to all the major population centers in North America, South America, Europe, Asia, Africa and Australia. This is an advantage RRST holds as no single location teleport can boast of the same geographic reach.
RRST also hosts 7 other satellites, 3 in Israel and 4 others around the globe. From these teleports RRST transmits to 21 satellites and receives transmissions from 48 satellites. RRST does not own the satellites or other transmission capacity such as the fiber optic lines they utilize. Instead they lease time/space. This has kept RRST's capital expenditures fairly low in comparison to companies launching their own satellites.
RRST also provides a few other services:
1) RRST links their teleports to the internet on 4 continents to procure internet capacity.
2) RRST's content management services involves digital archiving and compilation of a customer's programming for the purposes of providing automated targeted programming for a specific channel. RRST provides these playout services to more than 65 television channels for distribution through the RRSat Global Network.
3) Satellite newsgathering services [SNG] through a fleet of ten fully-equipped vans. The bulk of RRST revenues however are content transmission and distribution to and from a fleet of satellites.
The driver is the globalization of content. The number of satellite television channels worldwide grew from approximately 1,000 in 1995 to more than 13,000 in 2005, and is expected to grow to more than 29,000 television channels by 2013. RRST believes HDTV will lead to increased bandwith needs and should be a revenue driver into the future. The teleport sector generated revenues of approximately $13 billion in 2005.
Barriers to entry
RRST believes there is a significant barrier to entry for their business. From the prospectus: 'to offer global content distribution services, it would be necessary to procure a critical mass of transponder capacity on multiple satellite platforms, which would entail negotiations with multiple suppliers.
In addition to incurring the cost of the acquisition of this capacity, a potential new entrant would need to incur a substantial long-term financial commitment for the capacity, without any assurance of corresponding revenues (particularly since our business entails a lengthy sales cycle, typically 6 months to a year, before receipt of a customer commitment).' In other words, a new entrant into this space would need to make a substantial commitment of capital well before receiving revenues.
$2 a share in cash post-offering, no debt.
4 X's book value on a $12 pricing.
RRST receives most of their revenues in US dollars, however most expenses are in Euros or New Israeli Sheckels(NIS). There are also certain embedded derivatives involved when RRST enters into contracts with customers in which the method of payment is not the principal denomination of that country. RRST believes the gains/losses from these embedded derivatives are not material to operations.
At least 10 straight quarters of revenue growth. Revenues were $24 million in 2004, and $31.3 million in 2005.Through the first 9 months of 2006 appear on track $43 million in 2006, a 37% annual increase.
2005 - $31.3 in revenues with a 37% gross margin. Operating margins were 24%, net margins 17%. Earnings per share were $0.31. On a pricing of $12, RRST would be trading 39 X's trailing earnings.
2006. Based on results through first 3 quarters, RRST should grow revenues by 37% to $43 million. Gross margins in the 36% range with operating margins of 24%. Net margins should again be in the 17% range with earnings per share full year of $0.43. On a pricing of $12, RRST would be trading 28 X's 2006 earnings.
RRST has carved out a nice niche in an evolving and growing sector -- global satellite broadcasting. This is a well managed company growing revenues consistently quarter after quarter. Because very few worldwide broadcasters have their own distribution network(the big US broadcasters being an exception) demand for RRST's services should continue to grow annually the next 5+ years.
This is a far better deal then the other 2 satellite ipos this week. I like this deal. Solid growth, strong management and a small offering with plenty of room to appreciate mid to longer term. Recommend.
RRST since IPO: